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Italian banks and ECB rates stuck at 4.50%: what impact?

ECB rates remain stable at 4.50%: will Italian and European banks suffer impacts on their balance sheets? The banking sector is under special observation, despite the fact that the most turbulent months with bankruptcies made in the USA and beyond seem to have passed.
Resilience and solidity characterize Eurozone banks, according to the ECB.
However, it is worth remembering 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.
With the meeting on October 26, the interest rate remained at 4.50% and the deposit rate at 4.00%, considered a record level.
The fight against inflation, meanwhile, remains a priority and is not over according to the latest indications.
The primary tool that the central bank has at its disposal are rates.
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.
In this way, demand and therefore inflation are slowed down.
But what does all this mechanism mean for Italian banks? The effects of the ECB rate hike are different, the details.
read also ECB meeting today, pause on increases.
Rates stuck at 4.50%.
What did Lagarde say? High ECB rates, higher profits for Italian 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.
read also Banks in Italy are dying due to inefficiency Some analysts have also spoken of extra profits for banks due to this direction of the central bank.
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.
The forecast is largely outdated.
The experts, among other things, had estimated that Italian institutions would have benefited more from this tightening of the ECB, with a significant increase in profitability.
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, as well as confirming the stagnation in the Eurozone in recent months.
Banks are already seeing – as indicated by the ECB numbers – a continued sharp net decline in demand for property loans, with mortgages continuing to rise.
Furthermore, high inflation can also mean high operating costs.
However, the impact on net interest income is seen as positive for European banks in general, and also Italian ones, despite higher operating and credit costs.
read also Why banks now fear the ECB Pay attention to the weight of bonds in bank balance sheets.
Government bonds, in fact, are experiencing a decrease in their price, with an increase in yields, thanks to the monetary policy of central banks.
This means that for a bank to sell government bonds now to obtain liquidity could mean receiving a sum lower than the initial value.
This is what happened in the collapse of some US banks.
Finally, it should be noted that at the meeting on 27 July the ECB decided to set the interest rate paid to banks on minimum reserves at 0%, in order to reduce the amount disbursed after a record increase in rates.
The minimum reserves of the credit institutions had so far been paid at the same level as the deposit rate.
The ECB explained the move by saying: “This decision will preserve the effectiveness of monetary policy by maintaining its current degree of control.
It will improve the efficiency of monetary policy by reducing the overall amount of interest to be paid on reserves to implement appropriate guidance.” Furthermore, on the ECB table there would be the issue of increasing the minimum reserve requirements, to further reduce excess liquidity on the market.

Author: A.W.M.

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