There has long been a suspicion that the European Central Bank is more concerned with the welfare of the banks than with the concerns of the citizens. The high rates of inflation put a strain on people, and the currency watchdogs were caught off guard by the high prices. Recent hikes in interest rates are intended to slow things down, but it will be years before inflation returns to target levels. Meanwhile, banks in Europe are making a lot of money from the turnaround in interest rates. “The ECB will pay out 92 billion euros to credit institutions this year,” writes academic Paul De Grauwe in one Article for the Center for Economic Policy Research (CEPR). This money then escapes the state budgets to which the ECB distributes its profits every year. “These profits belong to society and should be paid out to governments.” Banks don’t need any “subsidies” from monetary authorities.
Why is? The banks from the monetary union store their surpluses totaling around 4.6 trillion euros in their accounts with the central bank. They currently receive an interest rate of two percent for this. This is the so-called deposit rate, which has been negative for many years. In this phase, the credit institutions had to transfer “penalty interest” to the central bank – for German banks this amounted to 15.8 billion euros in the years 2016 to 2021, according to data from Barkow Consulting. Now it’s the other way around: Since the ECB is likely to raise the key interest rate even further due to inflation, the profits for the credit institutions could be significantly higher, says the economist from the London School of Economics.
Banks are always benefiting from monetary policy: Most recently, they received billions in additional risk-free income – also because of the now high key interest rates – as a consequence of the large-scale, extremely profitable loan program from the Covid crisis, known under the abbreviation TLTRO 3. Only late and after massive criticism from expert circles, the ECB stopped this windfall.
Such bank aid has always been difficult for citizens to understand, even in the economically difficult years from 2014, when protracted deflation threatened. At that time, the idea of ”helicopter money” for citizens always bounced off the decision-makers at the central bank. Former Federal Reserve Chairman Ben Bernanke once used the helicopter money metaphor, which is attributed to economist Milton Friedman. According to the idea, a central bank would have to drop dollar bills for consumers across the country from a helicopter in a deflationary situation – figuratively speaking. Specifically, a few years ago there were proposals that the ECB should give every adult 500 euros to get the economy going. But nothing came of it.
The credit sector makes decent money, and in some cases without risk
On the other hand, the banks now also gain in the high-inflation phase, in which the ECB raises the key interest rate sharply in order to dampen price pressure. The monetary authorities raised interest rates four times in the past year. Higher interest rates dampen investment and demand. As a result, it is expected that inflation will fall again. However, it usually takes a year for the increases in the economy to have the desired effect. So the suffering of the citizens will continue, while the credit sector makes good money, and sometimes without risk.
The academic De Grauwe argues that the banks are not entitled to these “subsidies” through the deposit rate. After all, these are sight deposits that are available at any time and do not have to bear interest. After all, private customers would not receive any interest on their checking accounts from their bank. There is no reason for the ECB to act differently with the banks. In general, according to De Grauwe, the concept of interest on deposits was adopted by the Bundesbank – other European central banks had not offered this before joining the monetary union either.
The excess reserves of the European banking sector have risen in recent years to the extent that the ECB bought government bonds worth trillions from the institutions in the Draghi era. An example: The central bank now holds German government bonds worth around 900 billion euros – that’s almost half of the entire German government debt.
A bank could reduce the surpluses it received from these bond sales on the ECB account, for example by granting more credit or buying securities. But as long as you get a risk-free interest rate of 2 percent, the pressure to do so is rather weak. The crucial question is: is this really a subsidy from the ECB?
It is said that the ECB is not there to generate profits for the citizens
“I think subsidy is indeed the wrong term. The ECB bought government bonds from the banks. Which of the two made or lost money with it then depended primarily on the ECB’s monetary policy course, which the banks cannot influence,” said Dirk Schumacher, chief economist at French investment bank Natixis. “At the beginning of quantitative easing, i.e. the massive bond purchases, and the low-interest phase, the whole thing was quite expensive for the banks, since they were only able to pass on the negative interest to a very limited extent. Now it’s all turned around.”
The idea of abolishing the deposit rate is circulating in scientific circles – implementation is currently unlikely. Neither the ECB, the Bundesbank nor the German banks want to comment on De Grauwe’s proposal. According to central bank circles, abolishing the deposit rate would destroy an important control instrument of the ECB. In addition, the ECB is not there to generate profits for the citizens. Rather, they ensure stable prices: But unfortunately there is a problem.