European banking stocks bounced more than 3.5 percent Wednesday after European Central Bank President Mario Draghi hinted that the central bank is looking at the"side effects" of negative rates on the banking sector.
Net interest margin is the difference between the interest income generated by banks and the amount of interest paid out to their lenders The ECB has set a negative rate to encourage banks to lend out to the real economy, drive growth and stimulate inflation. One measure could be by pursuing a method used by other central banks with negative rates such as the Swiss National Bank and Bank of Japan, which tiers deposits. This effectively reduces the amount of excess liquidity earning a negative return at the deposit rate by allowing part of bank's excess reserves to sit at the zero percent MRO instead.