Sharply increased interest rates also pose risks for banks, ECB warns

Since July 2022, banks have been able to benefit from the sharply increased interest rates, because they receive interest on the money they park with the ECB and charge higher interest rates on loans. Now, according to the Central Bank, they are in danger of facing headwinds in three areas.

First, banks’ financing costs are expected to rise, the ECB says, partly because they will gradually offer higher interest rates to their savers. Secondly, banks are at risk of experiencing more defaults. And finally, the ECB is taking into account a “significant decline” in credit volumes, due to higher interest rates in combination with lower demand for loans and stricter requirements from banks.

“Weak economic expectations and the consequences of high inflation are weighing on the ability of people, companies and governments to service their debts,” said ECB Vice-President Luis de Guindos. “It is critical that we remain vigilant as the economy transitions to a higher interest rate environment coupled with growing uncertainties and geopolitical tensions.”

Still, the ECB emphasizes that the eurozone banking system is “well placed to weather these risks.” She does believe that banks’ recently increased capital buffers should be maintained to “help safeguard the resilience of the financial system.”