2023-05-31 18:06:00
Dhe message is twofold. On the one hand, euro area banks have weathered the recent financial turmoil in the United States and Switzerland comparatively well. The solid capital buffers helped here, among other things. On the other hand, the outlook for the financial system in times of rising interest rates remains fragile – Europe’s banks remain vulnerable to shocks. That’s according to the European Central Bank’s (ECB) semi-annual Financial Stability Report, which was presented by ECB Vice President Luis de Guindos on Wednesday.
According to the ECB, the banks in the euro area have coped well with the most recent bank earthquake. “But higher funding costs and lower asset quality could hurt profitability,” de Guindos said. An increase in corporate insolvencies, which hardly happened during the pandemic, must now be expected. Banks may need to set aside more funds for loan losses.
In America, several regional banks had collapsed since the beginning of March after enormous withdrawals of funds due to liquidity concerns. In Switzerland, Credit Suisse, which had previously had difficulties, was saved from collapse thanks to a state-organized emergency takeover by the larger UBS. A difficulty for the institutes: the rapidly increasing interest rates after years of zero and negative interest rates.
The ECB Vice President described how the financing costs of the banks, which initially benefit from the interest rate turnaround in terms of earnings, are now likely to gradually increase. An increase in interest rates for bonds has long been observed. On the other hand, the interest rates that banks have to pay for deposits from savers have only risen slightly so far. Many banks apparently still manage to attract new customers with higher interest rates, but continue to charge very low or no interest on deposits from existing customers without recording any major outflows of deposits.
ECB expects higher interest rates on savings
But the ECB thinks that will change soon. One consequence of their tightening of monetary policy is a shortage of excess liquidity in the banking system. The shortening of the balance sheet and the repayment of the long-term loans called TLTRO also contribute to this. “The low interest rates on deposits so far have been a result of excess liquidity,” said de Guindos. If liquidity is now tightened by the ECB, he believes that banks will also compete more intensely for customer deposits – which will cause interest on savings deposits to rise. The ECB does not make any forecast for this development, said de Guindos. However, the Financial Stability Report shows a graph that shows a development in interest rates on deposits, at least in the direction of higher values.
The ECB dedicates itself extensively to the development of the real estate markets. Finally, their thesis is that there are “vulnerabilities” in the phase of rising interest rates for households, companies and states that could have an impact on the banking sector. This will be a “test”. For the residential real estate market, the ECB reports that the rate of price increases in the euro area has fallen, but that on average no falling house prices have been observed. However, there are differences depending on the country – in Germany, for example, the prices for residential real estate have fallen at least quarterly.
Falling commercial real estate prices
The ECB reports that this is different for commercial real estate. Even before the first interest rate hikes, a dampening of the price development could be observed, which was intensified with the interest rate turnaround. Commercial real estate prices are now falling on average in the euro area. The transaction volume has also fallen significantly in recent months.
Anti-inflation priority
Concerns about the banks and the somewhat declining inflation rates at the same time had also triggered a debate over the ECB’s further course of action in the past few months. However, ECB Vice President de Guindos left no doubt that the central bank would give priority to combating inflation. “Our mandate is price stability,” he stressed. In any case, it is very difficult to achieve financial stability without price stability. “Price stability is crucial for lasting financial stability,” he said. “However, if we tighten monetary policy to bring down high inflation, it can expose vulnerabilities in the financial system.”
At the same time, deputy ECB President Christine Lagarde stated that the latest figures on inflation were encouraging. “The data we got yesterday and today is positive.” The fall in inflation was greater than analysts had expected. “The news we are getting is positive and pointing in the direction of an important decline in headline inflation.” But it is not yet a “victory” over the price surge. The ECB intends to decide on the next rate hike in around two weeks; a further rate hike of 0.25 percentage points is expected. In the report, the central bank also emphasizes that, from its point of view, it is “essential” to complete the European banking union and, in particular, to create a common European deposit guarantee system.
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