Euro zone banks have faced the prospect of customers' cash deposits, usually a boon, turning into a burden since September, when the European Central Bank began to charge banks 0.20 percent interest to park funds at the central bank.

The ECB says the move is needed to combat the risk of the euro zone suffering Japan-like deflation and to force banks to lend to small- and medium-sized businesses.

But Germany’s top financial regulator warned that banks could take on unnecessary risks as the burden of negative interest rates pressures them to consider higher-yielding, higher-risk investments.

"Excess liquidity could even threaten the banking system if it is put to poor use," Elke Koenig, head of watchdog Bafin told Reuters on the sidelines of a conference.

German banks got into trouble in past years through such "credit substitution" operations, which saw some invest in structured products that suffered in the financial crisis, she said.

Speaking at the same conference, Deutsche Bank's (>> Deutsche Bank AG) Chief Financial Officer Stefan Krause said profitability would be hurt because banks found it difficult to pass charges on to clients. "We will have to eat the bill for awhile and I don’t know how long banks can stand this," he said.

Germany’s second-largest bank, Commerzbank AG (>> Commerzbank AG), said on Thursday it was set to pass some of the ECB’s deposit charges onto major clients by charging fees.

Krause said it would be to "psychologically" difficult for clients to accept the idea of paying to deposit cash, forcing banks to absorb the negative margin.

The longer negative rates hold, the harder it will get for banks to foot the bill, he said.

The head of the German banking association BdB, Michael Kemmer, said negative rates put banks and their big corporate clients into diametrically opposed positions.

Some banks may even use "prohibitive pricing policies" to dissuade big corporate clients from making large cash deposits at the end of the year, Kemmer said.

German deposit insurance schemes calculate their fees on the level of deposits recorded on Dec. 31, he said, meaning banks had another reason not to want to be holding big cash funds.

(Reporting by Thomas Atkins; editing by Jonathan Gould and Crispian Balmer)

Stocks treated in this article : Deutsche Bank AG, Commerzbank AG