ELTVILLE, Germany (Reuters) - Euro zone banks are benefiting from the European Central Bank's sub-zero interest rates and they are "really far" from converting their deposits to cash, ECB Vice President Vitor Constancio said on Friday.


Banks, particularly in Germany, have complained that the ECB's charge on deposits is eating deep into their profits and sources told Reuters earlier this week Commerzbank is even considering storing euro notes to avoid parking money with the ECB at a penalty rate.


Constancio, however dismissed the chance that lenders would switch to cash en masse, arguing that even banks in Switzerland, where the charge on bank deposits is even higher, have not cut their deposits.


Still, he accepted that the ECB's negative deposit rate policy had its limits because banks could "at a certain point" start storing cash to avoid the penalty rate.


"The policy has costs... and limits are related to cash preference, which could start at a certain point," Constancio told a conference in Germany. "But we are really very far away from those levels."


The ECB has charged banks for depositing cash for the past two years and bought 1 trillion euros worth of assets to boost inflation, which has undershot its target for 3 straight years with forecasts suggesting several more years of misses.

Constancio argued that declining funding costs, stable interest margins, one-off capital gains and rising volumes have more than offset the negative impact of ultra low rates.

"So far so good, in the sense that the overall impact of our policies on profitability of banks has been positive, even in net interest income," he said.

Constancio also defended the ECB's policy of focusing on inflation given that price stability is its primary mandate and rejected calls, including from Bundesbank chief Jens Weidmann, to focus on broader financial stability risks.

"We think that financial stability cannot be and should not be a priority for monetary policy," Constancio added.

(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Dominic Evans)