Does the increase in the main interest rates of the European Central Bank (ECB) pose a risk to German banks? At least that’s what worries the financial sector watchdog (Bafin).
It should be recalled that from July 2022, the ECB increased the main interest rates four times. First by 50 basis points, then twice by 75 basis points, and last December by 50 basis points before further increases. That’s just a 250 basis point increase to try to adjust for price increases driven by energy costs. The rate on undistributed bank cash on loan is currently 2% and on short-term refinancing operations at 2.50%, the highest since late 2008.
The smallest banks are at the center of concerns
But this is not without consequences for banks. Although this policy improved the credit margins of banking institutions, it also affected the profitability of those who were forced to drastically reduce the value of assets in their securities portfolios.
“The first line of defense for many small banks has been to run out of hidden (capital) buffers”thus warned, this Monday in Frankfurt, Mark Branson, president of Baf.
The authority of the sector is now ” mainly capital planning Institutions that have little safety cushion in this area and are affected interest rate risk continued to rise.
It’s not the Deutsche Bank or Commerzbank behemoths that are worrying, but the smaller banks where the first nine months of the year have ended. “with an average negative after-tax result”.
Bankruptcy risk by SMEs and energy intensive companies
In addition, Bafin identified a number of other risks for the financial sector, including a wave of bankruptcies with the possibility of a cooling economy. This can be set by default especially loans to SMEs and energy intensive companies, Yes banks need to prepare Mark Branson says.
Especially since the ECB is expected to raise interest rates again at its next monetary policy meeting in early February to try to keep inflation down. Although the latter is down from 10% at the end of last year, it is still very high (9.2% in December for a year).
The ECB is concerned about bank assets and funding
Despite the policy that started last July, the ECB was also worried about the consequences of rising interest rates for bank funding, as well as the conflict in Ukraine.
The ECB is concerned that banks have so far shown resilience in the face of the fallout from the war in Ukraine. “According to the effects of the macroeconomic environment and the dynamics of financial markets on the quality of assets and the financing of banks”ECB supervisory board member Kerstin af Jochnick and banking supervisor Mario Quagliariello wrote in a blog post in December.
Around 115 major banks in the euro area directly supervised by the ECB (twenty countries that have adopted the single currency) still show stable funding ratios. (net fixed funding ratio) and liquidity, however “Controllers must look below the surface” according to inflation records, especially at a time when the long period of accommodative monetary policy is coming to an end.
For years, the ECB has been lending generously to banks at very low rates, rewarding them even if they lend enough to the economy in return. These so-called “TLTRO” loans will be due no later than the end of 2024, and the ECB even tightened its terms in October to encourage early repayments.
Deprived of this manna, “Banks may face financial problems”especially ” investors’ risk appetite has decreased », note the authors of the blog. For banks, profitability and the ability to maintain acceptable funding ratios may suffer.
Therefore, it will be one of the supervisor’s priorities in the coming months“explore banks’ TLTRO exit strategies as well as their liquidity and funding planning more broadly”.
The ECB also wants to closely monitor credit risk management, while the number of defaults is expected to rise amid the energy crisis and economic slowdown.