The European financial and banking system faces risks and challenges that the European Central Bank (ECB) closely monitors. The rise in rates has pushed a scenario whose consequences are felt in the credit market for households and families, but have not yet reached other segments such as the remuneration of savings. For Luis de Guindos, vice president of Eurobanco, it is a matter of time. “Sooner or later, deposits will be more remunerated in parallel with our monetary policy decisions,” he assured this Friday.
In a digital meeting organized by the consulting firm Kreab, Guindos expressed confidence that the transfer of rates to the market will eventually occur. Until now, European banks have been timid about rewarding their clients’ savings at the level expected with the change in monetary policy. In places like Italy, France or Portugal, the average rates offered to individuals are higher, but in countries like Spain, the level is close to 2.4% and is below the regional average.
The high liquidity cushion accumulated by Spanish entities during the years of monetary expansion and credit contraction means that the country’s large banks do not feel, for now, the need to compete for their clients’ deposits. Remuneration in other large Eurozone states is higher, but still below the 4.5% set by official rates.
In his speech, Guindos explained that this situation is also influenced by the increase in capital costs faced by banks, by doubts about the improvement in the profitability of the entities and because the market discounts that there may be an increase in provisions of their balance sheets.
On the side of risks for the financial sector, the vice president of the ECB has fundamentally identified two: on the one hand, commercial real estate, especially in the Nordic countries, where the price falls that are being recorded can affect the “non-banks” and thus infect the general financial system. On the other hand, the “non-banks” themselves, that financial system in which pension funds, insurance companies and other financial intermediaries (OFI) such as hedge funds or fintech companies operate with less control than traditional banking in search of better returns. In the opinion of Luis de Guindos, the high exposure of many of these investment funds and the high leverage, in a context of rising rates, can cause “tense situations” in the event that there are many requests for reimbursements. Hence the need to apply a good macroprudential policy also in this part of the system.
Despite the risks, the former Spanish minister has expressed confidence in the state of European banking, highlighting its good capital ratios and solvency situation, which is “very good.” “It does not generate concern among investors,” he said after spending a few days in New York meeting with representatives of that sector.
In this sense, the improvement in profitability, of 10%, and in solvency has stood out. However, he drew attention to the “doubts” surrounding the sustainability of this improvement in profitability in a scenario of economic slowdown in which an increase in provisions is discounted. “We cannot be complacent, the environment is one of economic slowdown, we believe that provisions for NPL – doubtful loans – are going to rise as well as banking financing costs.”
Regarding bank mergers, Guindos believes that “we should not see much more” in Spain because “the level of competition would begin to be affected”, but he did point to mergers that are cross-border.
Beyond the financial system, De Guindos has warned that the coming quarters will be marked by “a lot of uncertainty, very weak growth and the very notable impact of the withdrawal of fiscal measures by European governments.” Furthermore, he has expressed confidence that inflation “will go down”, although it is not advisable to lose sight of the price of oil, as he has pointed out, nor “fiscal policy itself, which could be more expansive than it should be.”
Regarding the fight that the ECB maintains against inflation, Luis de Guindos has warned that the factors that have put downward pressure on inflation during the last 20 years “will surely not be able to be reproduced and will even be reversed” in the future. “Structural trends were favorable to reduced inflation,” such as globalization, “very cheap” Chinese debt or the emergence of online shopping.
Faced with this, the world is experiencing “a period of fragmentation”, the end of peace in Europe due to the conflict in Ukraine or climate change, which will require very costly policies, which indicates that “all those tailwinds for a reduced inflation they will surely not be able to reproduce and they will even be reversed”.
More in the short term, De Guindos has celebrated the reduction in inflation in the Eurozone, although there is still “a long way” to reach the 2% objective, something that he hopes to achieve if the current rate level is maintained for long enough. He has pointed out that, for this, it is also necessary to coordinate monetary and fiscal policy, which runs the risk “of being more expansive than it should” at a time of withdrawal of stimulus measures to stop inflation.
The vice president of the ECB has urged taking advantage of the current moment of economic bonanza “to reach an agreement on the issue of fiscal rules”, since if its reform is not implemented in time it would be necessary to apply the current framework, which is “little realistic” in the face of debt increases resulting from the pandemic.