Banks are making a fortune on interest rates: here’s how – Corriere.it

A succinct note from the Bank of Italy came out the other day. He complains that inflation is leading banks to increase the cost of current accounts paid by customers. And it invites institutions – we read – “to carefully evaluate similar contractual changes to the detriment of customers, considering that the increase in official interest rates launched last July by the European Central Bank can have positive effects on the overall profitability of relationships between banks and their customers, potentially able to compensate for the increase in costs induced by inflation”.

In our country steeped in populism even in language, the Bank of Italy certainly stands out. Stay plush, flawless. I therefore take the liberty of translating freely: with the interest rate increase, the banks are already making a lot of money; that at least they don’t overburden customers by also raising commissions on their accounts. Yeah, but how much money are the banks making thanks to the ECB rate hike? In the last three months of last year the top eight banks have seen annual increases in revenues almost all double-digit, up to 40% more. Even the profit is almost always exceptional. If institutions perform well, it has to be said, sometimes simply because they are well managed. certainly the case of the two largest in Italy, Intesa Sanpaolo and Unicredit. But the question of the origins of the entire category’s vast current profitability remains, especially after the banking crises less than a decade ago. Where does all that money the banks are making come from? I tried to understand more, thanks to the transparency (to be commended) practiced by the Italian Banking Association.

ECB and commercial banks

So here is what emerged, after the very rapid 3% increase in ECB rates between 27 July and 8 February last (aimed, as we know, at bringing inflation back under control). First for a clarification: from last summer to today the central bank has raised the cost of interest it asks commercial banks to provide them with liquidity (from zero to 3% per year, in standard cases), but it has also raised the ” deposit rate” (from minus 0.5% to plus 2.5%); in the latter case, it is about the yields that the ECB itself guarantees to the funds deposited by the commercial institutes themselves at the central bank. These funds deposited by commercial banks on their accounts in the ECB derive, in large part, from the liquid deposits that we customers entrust to them: we do this with the simple act of leaving our money in bank accounts. And we’re not talking about peanuts. Customers’ liquid deposits with Italian banks – excluding those of the banks themselves – are worth more than the gross domestic product: 2,134 billion euros last December (of which 1,260 billion from households and 423 from businesses).

Loan rates

So let’s get to the facts. The table above, drawn up by Unicredit’s chief economist Marco Valli, shows that in Italy the increases in rates on loans to customers have so far been among the highest in the euro area. For now, the ABI shares the information until February 1st, that is, after a 2.5% increase in ECB rates in less than six months. What happened during this period? Effectively, the average interest cost of business loans increased by 2.5% (from 1.20% in May to 3.70% in January). And the rates on loans to households to buy homes rose by 1.61% to 3.53%. In essence, the banks have passed on all the increases in the cost of money by the ECB to businesses, while they have passed on two-thirds of those increases to households. In fact we see the dynamics of credit to households, but above all to businesses, in a clear slowdown (below, from the Bulletin “Money and Banks” of the Bank of Italy). It is therefore to be expected that this year the Italian economy will not start racing.

Banks and savers

But now we are interested in understanding what happened on the other side, in customer deposit yields. In parallel with the increase in rates on deposits by the ECB in favor of the banks, has the interest that the banks themselves recognize to savers also increased? Yes, they went up. The problem of how much: they went on average from 0.31% last May (before the rate hikes) to 0.49% in January. In other words, while what the ECB paid to the banks rose by 2.5% a year, how much banks pay customers for their deposits jumped by just 0.18%. And note that it mostly happens with the same money: what we deposit in the bank and the bank deposits in the ECB. I try to put it another way. In the last six or seven months, Italian banks, on average, have raised rates in their favor seven and a half times more than they have allowed their rates to rise. And this is true even if the ECB has been symmetrical and fair-minded on these fronts. As a result, the returns that banks recognize to their customers on their deposits have grown, on average, fourteen times less than the returns for the same liquidity that the ECB recognizes to banks. That is, in fact, the credit system has not passed on the rate increases to its customers: it has kept almost all of it for itself. In the meantime, Per has passed on almost all of the increase in ECB interest rates to customers, when the latter has to pay the banks on loans and mortgages.

liquidity

Ok, here we need all the nuances of the case. Italian banks are no exception in Europe. Time-bound accounts yield more than sight accounts (obvious). It is true that when deposit rates were negative at the ECB, Italian banks never passed the costs on to account holders. And not all the liquidity of Italian households and businesses – 1,683 billion euros last December – deposited by banks with the ECB to capture interest on deposits. From what I understand, last December there were deposits in the central bank of around 220 billion from Italian credit institutions. The rest was used in loans, purchases of government bonds and more. In any case, the profit margin in favor of the banks, under these conditions, is some tens of billions annually. The difference between lending rates and the cost of raising cash for institutions rose to almost 3%, far above the 1.5%-2% of a “normal” situation. It’s easy to make money like this. It makes me think of that financial manager who takes a friend to the port of New York to proudly show him his yacht and those of his colleagues. The friend looks and replies: Ok, but where are your clients’ yachts?. We could ask ourselves today where are the yachts of millions of small Italian savers. But I’m willing to bet that this nirvana for banks won’t last. Today they allow themselves to lord it over their customers, because they don’t need liquidity and are therefore even willing to lose them if they don’t comply with the conditions offered. The maxi auctions of liquidity at subsidized rates by the ECB in pandemic times left the Italian credit system still around 330 billion, inexpensive, available. When the institutions reimburse the ECB for all that mass of money, they will be much more interested in customer deposits. They will have to offer more to attract or keep them. Provided that all of us, ordinary people, start asking at the counters where our yachts are.

If you want to write to me, my email: [email protected]
This article was published in the Whatever it Takes newsletter of the Corriere della Sera. To subscribe,Click here.

Subscribe to the newsletter of The Economy

Whatever it Takes by Federico Fubini

The challenges for the economy and markets in an unstable world

Europe Matters by James Fontanella-Khan

Italy and Europe seen from America

And don’t forget the newsletters
The Economy Opinions and the Economy 6 pm