September 8, 2023
Banking International

Good And Bad News For Eurozone Banks

Since the summer of 2022, the European Central Bank has raised its key interest rates four times. The deposit facility rate, the rate for main refinancing operations, and the one on the marginal lending facility now stand at 2 percent, 2.5 percent and 2.75 percent, respectively. Further hikes are expected for the coming months if inflation continues its rapid rise. This shift in economic policy has significant consequences for eurozone banks. 

Over a decade of ultralow and even negative rates, which had weighed heavily on their profitability, has ended. But does it mark a return to a long-forgotten pre-2008 crisis “normal”? No one can say for sure. 

In the aftermath of the global financial crisis, the negative interest rate policy was promoted as the ultimate wonder weapon to get growth back on track. At the time, elite economists from the International Monetary Fund even pushed for “deep” negative rates to fight the Great Recession. 

In many ways, that theory was flying in the face of common sense. In an ordinary monetary world, interest is the money you owe when borrowing or receive when lending. Likewise, commercial banks would earn interest when they park cash with their central bank. In a world of negative rates, it is the other way around. Under such circumstances, borrowers should be able to find a mortgage that pays them interest, whereas savers must pay a fee to the bank that lends out their money. Banks, for their part, are taxed on their deposits at the central bank. 

Leave a Reply

Your email address will not be published. Required fields are marked *