ECB rates at 4.50%, what consequences for the banks?

With ECB rates confirmed at 4.5% (4.0% on deposits) at the March meeting, what will the impact be on banks? The banking sector is one of the most involved in the central bank's policy on the cost of money and the prospect of cuts from the summer onwards – with June being a key month as reiterated by Lagarde – could leave marks on the balance sheets of credit institutions.
It should be remembered that the banking sector is the first to be linked to the decisions of the Eurotower precisely because it operates through the application of the interest and deposit rates established in Frankfurt.
The reasoning is clear and directly involves the banks: the Eurotower raises the reference rates, it is more expensive for the banks to finance themselves (asking the ECB for money), so they act by increasing the rates on loans to families and businesses.
In fact, it is also convenient for credit institutions to save, so much so that the deposit rate that banks receive by leaving sums as collateral with the ECB has risen.
But if the central bank changes policy, institutions will receive lower interest payments.
In the sense of an end to rate increases, the link between bank balance sheets and ECB decisions is therefore relevant.
High ECB rates, higher profits for the banks The first equation to make is the following: if the ECB's interest rates increase (i.e.
the cost of borrowed money), the banks' profits also increase.
Why? Such a strong and sudden increase in interest rates means that banks benefit from the interest margin, which is nothing other than the difference between active interest (the one it collects from those who ask for loans) and passive interest (the one it pays to customers who deposit funds).
With higher borrowing costs, the interest income for the bank also rises.
On the other hand, it will decrease with falling rates.
Last summer, the S&P agency predicted that a "final" increase of 200 basis points (2%) in rates would correspond to an increase in the average interest margin of European banks of around 18% compared to 2021.
What what is certain is that 2023 was a golden year for European banks.
As underlined in our analysis, adding up the net profit of the 20 largest European banks comes to 103 billion euros, up 32% compared to the 78 billion recorded the previous year…
as many as three quarters of these financial institutions credit have recorded profits never seen before.
Not only that, the increase in returns linked to the liquidity deposited in the bank by the saver (the deposit rate paid by the bank in favor of those who deposit money), for example on deposit accounts, did not go hand in hand with the increase in interest rates.
interest, for example, on mortgages.
This means that the banks enjoyed an advantageous differential between interest income and expense.
What do banks risk with high interest rates? There is, however, the flip side of the coin.
The macroeconomic context, in fact, remains very uncertain and the ECB has revised its growth forecasts downwards.
Banks are already witnessing – as indicated by the ECB numbers – a continued sharp net decrease in demand for real estate loans, with mortgages having risen.
Furthermore, the effect of such a high cost of financing could become apparent in the coming months, with an increase in insolvencies by businesses and families who have borrowed and have to pay too high interest.
This could shake up bank balance sheets.
It is no coincidence that in Germany the relevant authority has alerted financial institutions to set aside more provisions, taking them from last year's extra profits, in case of insolvencies to be covered.
Exposure to the real estate system can also cause banking turmoil.
The sector is in crisis after the record rise in interest rates which weakened demand for homes and dragged their prices down.
read also Bank alarm in Germany, what can happen in 2024