The past week is notable for how suddenly and unanimously both ruling and opposition politicians began to promise what seemed completely impossible just a few days ago. Namely, they promised to either impose a surplus profit tax on banks, or take away the right to use the interbank euro market index Euribor, whose jump determines this surplus profit, in determining interest rates. The 131 million euros earned by Latvia’s largest bank “Swedbank” in the first half of this year turned out to be 84 million more than in the corresponding period of 2022. SEB banks (group of financial companies) follow with an increase in profit from 45.3 to 82.4 million euros, etc. Latvian commercial banks in general show a profit of 335.9 million euros for the first half of the year, which is 2.6 or 206 million euros higher than the indicator for the corresponding period of 2022. The profit at that time can now serve as a guide in calculating the excess profits of the banks, which it would be a fair measure to take away by special taxation or some other method.
Euribor is what the ECB wants it to be
European commercial banks are not suspected of manipulation to artificially raise the Euribor rate. This indicator obediently follows the refinancing rate set by the European Central Bank (ECB).
When in 2014 the ECB set its rate in the negative area of about half a percent, the Euribor rates soon followed; it is a bundle of rates, in which the values of the rates differ slightly depending on the duration of the interbank credit fixation period (for a month, for 3 months, etc.). In July of last year, the ECB raised its rate to zero and in September – already above it. On August 2 of this year, the ninth consecutive increase in the refinancing rate of the ECB to 3.75% came into effect. Euribor rose above zero in August last year and is currently hovering around 3.9%. The rise in Euribor should continue as the impact of the August 2 shock has not yet been exhausted and the ECB rate has not yet been raised to its maximum.
By packaging the refinancing rate of the ECB in the interbank credit rates, commercial banks show obedience to the ECB, whose policy is aimed at making loans more expensive and which also has supervisory functions in relation to commercial banks. It would be quite funny if the ECB’s policy was opposed by the Bank of Latvia, which along with Latvia’s entry into the euro zone became a structural unit of the ECB. The promises of Latvian politicians to amend the policy dictated by the ECB are surprising, because Latvia is dependent on loans, which would not be possible if the ECB did not print euros (here we mean the total issue in mostly non-cash money) also for Latvia’s needs. Therefore, it will be necessary to carefully monitor whether politicians will do more without bidding and such decisions, the effect of which would be only decorative on the circulation of money in Latvia.
Banks must hide the extra trillion euros
The rates required by commercial banks are higher than Euribor, because the selection and supervision of borrowers undoubtedly requires expenses for banks above those expenses with which banks are guaranteed access to money at any moment and in any amount. Banks need such access to money not only for issuing new loans, but also for maintaining old loans. However, banks must settle with their depositors and other claimants faster than the debtors return the principal sums of their loans and at least part of the loan interest, with which the banks must cover the deposit interest. Such money circulation should take place according to textbooks and centuries-old banking traditions, but the already mentioned negative ECB and interbank credit rates signal that now everything is happening differently.
Namely, commercial banks take into account the refinancing rate of the ECB, not because they should borrow from the ECB, but because the ECB is the supervisor of commercial banks, which can close any disobedient bank in exactly the same way as ABLV bank was closed in Latvia. Commercial banks must not show that both the refinancing rate of the ECB and the Euribor have lost their meaning precisely because of the ECB, since the ECB has printed more euros than the euro zone needs.
Looking into the past that still remains in the mind, the view stops at July 2014, when the amount of euros exceeded 10 trillion for the first time. On the other hand, in June of this year, a little more than 16 trillion euros were already issued. There can be no doubt that the Eurozone economy has grown 1.6 times in less than ten years. So there is money printed, part of which is put into circulation with the help of inflation, and part is kept in banks, which do not care at all what price the ECB offers money at. Banks do not need to borrow money either from the ECB or from each other in order to maintain the small amount of credit that commercial banks have issued in Latvia, the eurozone and the European Union, where some countries still retain their central banks with the right to print money. The billions issued in retail loans in Latvia and the trillions in Europe should be called small compared to the amount of money printed by the ECB and other central banks, which significantly exceeds the banks’ ability to find borrowers from whom the money can be returned.
Commercial banks have to demand high interest rates not because they have to buy money at a high price, but only out of obedience to the ECB, which raises its refinancing rate with the aim of further reducing the amount of lending and thus the amount of money that participates in raising inflation. Inflation shows the increase in consumer prices, in the formation of which the money printed by the ECB does not participate while it is lying in the banks. Therefore, commercial banks are given the task of keeping money so that the public does not shout that the ECB has printed too much money.
To be more precise, the ECB is trying to silence the outcry that started when annual inflation in the eurozone already reached 10%, including exceeding 20% in the outskirts of the eurozone like Latvia. The ECB’s promise is to keep annual inflation at 2%, which is likely to happen if the ECB continues to clamp down on lending for another couple of years.
Get rid of your home and don’t pay loan interest!
Unfortunately, it is impossible to silence the shouting about inflation and the shouting about high interest rates at the same time. If the protests about one misfortune go down, then only to the extent that they take effect for another misfortune. Only recently, the politicians of Latvia joined the anxiety of the citizens, first of all mortgage borrowers, about the inability to settle their credit obligations, the amount of which is growing with the Euribor. One of the platforms from which politicians promised to reduce the burden of loan interest rates was the August 2 session of the Saeima Budget Commission, which the chairman of the commission, Jānis Reirs, concluded with the following words: “We must help those who have mortgage loans and who cannot [tos nomaksāt]. No, as if the banks can say that everything is happening – that there are no delays in payments, but at whose expense is it all happening?! To the fact that families give up everything.”
J. Reira’s words are equally suitable both for encouraging borrowers that high officials understand their misfortune, and for reporting to the ECB that its policy is being perfectly implemented in Latvia. Here, the tasks of slowing down the circulation of money and thus covering up the ECB’s sin by printing money, and the increasingly powerful “green course” to reduce consumption overlap. At the household level, people are faced with a choice between their home or the opportunity to go on a trip abroad once a year. J. Reira’s words that “families give up everything” can lead to the advice not to create a family at all, because non-existent families do not need housing and will not have to give up anything.
Explanation, warning and invitation of the Bank of Latvia
The reference to the ECB should soften the first impression of the presence of the Bank of Latvia for Swedish and not only Swedish commercial banks. Latvijas Banka, as a structural unit of the ECB, would not hesitate to harm them if there was such an order from the ECB headquarters in Frankfurt. But now commercial banks combine the pleasant earning with useful obedience to the ECB.
The Bank of Latvia responded to politicians’ promises to deprive banks of excess profits with a statement on August 3 that “linking loans to Euribor cannot be considered unfair business”, from which it follows that banks should not be punished by confiscation of money obtained as a result of raising Euribor rates. There is also a warning in the form of a question, would replacing Euribor with some other loan interest mechanism really “be more beneficial for companies and households”? Of course, the new formula for calculating credit interest can be made even more disadvantageous for debtors, if that is the task of the ECB. If the Latvian state would really achieve very favorable credit interest rates for debtors, then nothing would prevent banks from gaining the same amount of profit at the expense of the same or other customers by raising banking service tariffs.
The most recent activity of the Bank of Latvia is the TV interview of Santa Purgaile, the deputy president of the bank, on August 7, in which she reassured that the time of the banks’ record-breaking profits would not be long. This is very reminiscent of former Latvian Prime Minister Aigars Kalvīš’s refusal to take measures against inflation in 2005 and 2006, because inflation is like a runny nose that goes away by itself.
Another statement of S. Purgaile echoes what she herself said shortly after she was appointed in October 2019 to the nationally important position of chairman of the Financial and Capital Market Commission. Then, in March 2020, she cheered up the public, that is, bank clients, with the words “that a new bank can enter Latvia”. In the second half of 2023, there is no indication of the appearance of such a competitor, but S. Purgaile has strengthened herself in the power apparatus and learned from her mistakes. Learned to make such promises, the fulfillment of which is impossible to verify. Banks should not be deprived of extraordinary profits, but should be invested in “financial technologies that would make financial services more accessible, cheaper, and more convenient” of already existing banks.
2023-08-08 02:15:25
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