interest rate effect, loan payment delays doubled – Corriere.it

The sudden increase in interest rates is reducing the ability to repay loans. In the first three months of this year, the incidence of the flow of loans showing late payments, even if not yet such as to require classification as non-performing, doubled to 1.6% of all performing loans on the basis of year, underlined the governor of the Bank of Italy, Ignazio Visco, during his speech at the annual meeting of the Italian Banking Association (ABI). Prompt recognition of expected losses, he warned, is also essential for reducing the possible pro-cyclical effects associated with the economic slowdown. Equally important, he added, is ensuring an adequate level of NPL coverage, especially for less significant banks.

References to the ECB

The considerations of the governor of Bank of Italy on the risks of rising interest rates are not addressed only to national banks. But also to the European Central Bank and its members. I don’t understand and still don’t share observations even recently advanced which would lead us to prefer the risk of being more, rather than less, restrictive, remarked Visco. On the contrary, we should proceed with the necessary prudence in order to avoid unwanted repercussions on economic activity, financial stability and price stability itself in the medium term. Therefore, a pause in the rise in interest rates should be considered in order to evaluate the effect of the measures adopted so far. In addition to the increases in reference rates, monetary policy can count on maintaining them at a level and for a period of time adequate to bring inflation back to the target value of around 2%, explained Visco. Now that rates are in tight territory, calibrating the duration of the monetary tightening, rather than excessively increasing its extent, would have the advantage of facilitating a more informed analysis of the effects of the action taken so far.

Mortgage increases

Moreover, the ECB’s policies were rapidly transmitted to credit, leading to a sudden increase in interest on mortgages and business loans, as well as a corresponding contraction in the demand for loans. On the other hand, the passage of monetary tightening to the remuneration of bank funding was slower, in particular as regards current accounts. In the last 18 months, Italian banks have increased rates for businesses and on new mortgage loans to households by around 360 and 280 basis points respectively, recalled Visco, noting that the cost of bank funding is also on the rise, but the effects of the rises in official rates on demand deposit yields are still very low. The phenomenon, explained the governor, is also linked to the abundant liquidity obtained by banks in the last decade which may have led to less competitive pressure between banks in the segment of counter current deposits which should now be followed by a gradual increase, with corresponding more decisive, rate increases.

The OK from Abi to Salvini

An orientation that the ABI has not shared up to now, underlining several times that current accounts are not of an investment nature but of a service nature and that consequently they are not to be remunerated. It remains to be seen whether the moral suasion of the ECB, the Bank of Italy and the government will be able to move the banks from their position which have built a record interest margin on the difference between the rates applied to loans and those recognized on deposits. In the meantime, the ABI has opened up the possibility of extending the installments to those with variable mortgages, as requested by the Minister of Infrastructure, Matteo Salvini. To this end, according to the president of the ABI, Antonio Patuelli, a change of the rigid rules, too rigid of the EBA, is necessary to facilitate those who are late in paying mortgage installments.