The European Central Bank’s recent decision to raise interest rates in July for the first time in eleven years has triggered reactions of all kinds: Consumers suffering from high inflation are wondering why the ECB is waiting so long to raise interest rates. Others fear that the more expensive loans will put the economy under pressure. But one group was happy: the European banks and savings banks. They could now earn many billions more in their lending business with the ECB.
The matter is very complicated in detail. The background is a special ECB lending program for the banking sector after the outbreak of the Covid crisis. It bears the name TLTRO 3 and has a wonderful side effect: the 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 repay 990,000 euros at the end of the term. A discount of one percent. The only condition: the bank had to lend the same amount to companies. The ECB wanted to stimulate the economy and ensure that companies received enough liquidity.
Now that interest rates are going to rise, the margins for banks will increase. Depending on how quickly and how strongly interest rates rise, Europe’s banks – guaranteed by the ECB and therefore practically without risk – can collect around 24 billion euros by the end of the program at the end of 2024, according to the analysts at Morgan Stanley.
As households groan under rising inflation, banks receive extra profits guaranteed by taxpayers, which may then be distributed as dividends to shareholders and, worse, bonuses to employees? This is obviously giving the ECB a headache. Insiders confirmed a report by Financial Times, according to which the monetary watchdogs want to prevent the banks from tapping these additional margins. The central bank may have initially overlooked this gap.
According to Commerzbank, the ECB’s high special interest rates would have distorted lending
Overall, the banks have so far received subsidized loans from the ECB for EUR 2.2 trillion. Although there have been no further TLTRO loans since the end of June, the loans granted will not fully expire until 2024.
The central bank is convinced that the effects of Corona would have been much worse without this measure. However, large and stable companies in particular, which can easily get credit anyway, are likely to have benefited from this. Calculated on the loan amount, they cause fewer costs, and there are also significantly fewer risks than with smaller medium-sized companies. “We assume that, above all, more cheap loans were granted to large customers,” wrote the economists at Commerzbank in a study at the beginning of the year. It’s all an “acceptable trade-off,” so it’s a pretty good deal. Many banks would still have given out plenty of credit at the end of 2021 just to benefit from the program. The special interest rates of the ECB? Would therefore have “distorted” the “lending behavior” of the banks, according to the conclusion of the Commerzbank analysts. High volumes, but low margins.
Incidentally, some commercial banks have again become dependent on the central banks and states. Not only did the central bank help in the pandemic, the state in turn guaranteed loans to medium-sized companies or supported supposedly systemically important groups such as Tui or Lufthansa – also because their bankruptcy would have carried away some of the financing banks. “The banks have so far only repaid a fraction of the TLTRO loans that are due to the European Central Bank. Many do not have enough excess liquidity to pay off the loan debt to the ECB,” says Tamaz Georgadze, CEO of the Raisin interest rate platform.
In any case, the case shows that it is often difficult to see at first glance exactly how monetary policy affects the economy in individual cases. The financial institutions have been whining for years that they were the victims of the low-interest phase and therefore inevitably had to pass these “burdens” on to customers in the form of negative interest rates. But it’s not quite that simple, as another example shows: Until now, banks still had to pay 0.5 percent interest to the central bank if they parked money there themselves that they couldn’t or didn’t want to use in the lending business. However, one thing that was happily overlooked was that the central bank had granted banks and savings banks generous allowances in 2019, so that part of their central bank deposits were no longer burdened with negative interest rates.
Nevertheless, more and more banks had demanded negative interest rates of 0.5 percent above a certain amount. The actual motive was probably: to get the customers to invest their savings in life insurance policies, funds or home savings contracts, which brings in stable commissions for the financial institutions and usually high bonuses for the management.