Governor Pierre Wunsch of the National Bank has delivered a strong message to the Finance Committee regarding savings interest rates. He warned that banks’ profits will fall if the government imposes a legal initiative to determine the interest rate on savings accounts.
Wunsch emphasized that the National Bank will not support proposals that pose a risk to financial stability. He pointed out that no European country has implemented such a law. The governor reiterated that banks are increasing savings interest rates at a slower pace than recommended by the National Bank’s model.
One factor affecting the rate of increase in savings rates is the presence of fixed-rate home loans. In countries where such loans are prevalent, banks have a significant portfolio of loans with fixed interest rates. Higher savings interest rates immediately make these loans more expensive, impacting banks’ profitability.
Wunsch highlighted the example of Spain, where variable interest rates on home loans lead to faster increases in savings account interest rates. In Belgium, many employees have cheap home loans that adjust with inflation, reducing their monthly mortgage payments. Fixed-interest home loans are less common in Belgium compared to other countries, and Wunsch argued that savers partly subsidize these cheap loans.
The governor also discussed the competition among banks for lending, which has led to declining margins. In contrast, there is less competition in the savings account market. Wunsch attributed this to consumer inertia, as individuals prioritize securing the cheapest home loan rather than focusing on their savings accounts.
While banks may appear to be making excessive profits due to increased interest rates, Wunsch cautioned that the current climate of sharp rises in short-term interest rates, combined with an inverted yield curve, is not entirely positive. An inverted yield curve occurs when short-term interest rates exceed long-term rates. Wunsch predicted that banks’ profits would decline in the coming quarters.
Furthermore, Wunsch emphasized the importance of good balance sheet management for banks. Savings accounts help hedge risks associated with home loans, but banks must purchase additional cover for loans with longer terms. The governor warned that the interest rate risk does not disappear; it simply shifts to other parties, creating counterparty risks.
To illustrate his point, Wunsch referred to the example of Dexia, which fell despite being fully hedged against interest rate risks. This highlights the complexities and challenges banks face in managing their balance sheets.
Governor Pierre Wunsch’s remarks serve as a reminder of the intricacies of the banking sector and the potential consequences of government intervention in setting savings interest rates.
How has the absence of a legal initiative to determine interest rates on savings accounts affected other European countries?
F other European countries where the government has not imposed a legal initiative to determine the interest rate on savings accounts. This suggests that the National Bank of Belgium, under the leadership of Governor Pierre Wunsch, shares the same view and would not support such a proposal.
The governor also pointed out that banks have been increasing savings interest rates at a slower pace than recommended by the National Bank’s model. This indicates that banks are already cautious about the impact on their profits. One possible reason for the slow increase is the presence of fixed-rate home loans. Banks in countries where fixed-rate loans are prevalent have a significant portfolio of loans with fixed interest rates. Higher savings interest rates immediately make these loans more expensive, which can negatively affect banks’ profitability.
The example of other European countries not implementing a similar law serves as an important precedent for the National Bank’s stance. It suggests that such initiatives could have adverse effects on the overall financial stability of the banking sector.
In summary, Governor Pierre Wunsch of the National Bank of Belgium has delivered a strong message to the Finance Committee regarding savings interest rates. He warned that banks’ profits will decline if the government imposes a legal initiative to determine the interest rate on savings accounts. Wunsch emphasized that the National Bank will not support proposals that pose a risk to financial stability, highlighting the lack of implementation of similar laws in other European countries. Additionally, the presence of fixed-rate home loans plays a significant role in banks’ cautious approach to increasing savings interest rates.
