ECB interest rate hike: banks will be happy – Economy

The recent decision by the European Central Bank to raise interest rates in July, for the first time in eleven years, sparked all kinds of reactions: consumers suffering from high inflation wonder why the ECB has been waiting so long to raise interest rates. Others fear that more expensive loans will put pressure on the economy. But one group was satisfied: European banks and savings banks. They could now earn many billions more on loans from the ECB.

The case is very complicated in detail. The background is the ECB’s special loan program for the banking sector following the outbreak of the Covid crisis. It’s called TLTRO 3 and it has a great side effect: institutes receive money as a gift. And it works like this: if Bank X receives a loan of one million euros from the ECB, it only has to pay back EUR 990,000 at the end of its mandate. One percent discount. The only condition: the bank had to lend the same amount to companies. The ECB wanted to stimulate the economy and provide companies with sufficient liquidity.

Now that interest rates go up, bank margins will go up. According to Morgan Stanley analysts, depending on how quickly and how much interest rates rise, European banks – guaranteed by the ECB, and therefore virtually risk-free – may collect around EUR 24 billion by the end of the program at the end of 2024.

As households groan under rising inflation, banks get extra taxpayer-guaranteed returns that can then be paid out as dividends to shareholders and, worse, employee bonuses? Apparently it gives the EBC a headache. Insiders confirmed the report by Financial timesthat monetary watchdogs want to prevent banks from taking advantage of these additional margins. The central bank may have overlooked this gap initially.

According to Commerzbank, high ECB special interest rates would disrupt lending

In total, banks have so far received subsidized loans from the ECB worth EUR 2.2 trillion. Although there have been no further TLTRO loans since the end of June, the loans granted will not fully expire by 2024.

The central bank is confident that the effects of the koruna would have been much worse without this measure. However, large and stable companies that can easily get a loan anyway will benefit in particular. Loan-based loans result in lower costs as well as significantly less risk than with smaller midsize companies. “We assume that cheap loans were first of all granted to large clients,” wrote Commerzbank economists in a study at the beginning of the year. This is all an “acceptable compromise” so it’s a pretty good deal. Many banks would have made large amounts of loans in late 2021 just to take advantage of the scheme anyway. ECB special interest rates? Therefore, according to the conclusions of Commerzbank analysts, it would “disturb” the “credit behavior” of banks. Large volumes but low margins.

Incidentally, some commercial banks have once again become dependent on central banks and sovereigns. The central bank not only helped in the pandemic, the state, in turn, guaranteed loans to medium-sized companies or supported allegedly important groups such as Tui and Lufthansa – also because their bankruptcy would distract some of the financing banks. “Banks have so far only repaid a fraction of the TLTRO loans that are owed to the European Central Bank. Many of them do not have enough liquidity surplus to pay off their credit debt to the ECB, ”says Tamaz Georgadze, CEO of Raisin bank. rate the platform.

In any case, the case shows that at first glance it is often difficult to see exactly how monetary policy affects the economy in individual cases. Financial institutions have been complaining for years that they have fallen victim to the phase of low interest rates and therefore have inevitably had to pass on these “burdens” to customers in the form of negative interest rates. But it is not as simple as another example shows: until now, banks have had to pay the central bank 0.5 percent. interest if they parked money there themselves that they could not or did not want to use in the loan business. However, one thing that was happily overlooked was that the central bank granted generous discounts to banks and savings banks in 2019, so that some of their central bank deposits were no longer burdened with negative interest rates.

Nevertheless, more and more banks demanded negative interest rates of 0.5%. above a certain amount. The motive was probably to persuade clients to invest their savings in life policies, funds or savings deposits, which brings stable commissions for financial institutions and usually high bonuses for management.

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