Distortions in the interest rate markets could pose a threat to German and European banks in 2022.
(Photo: Reuters)
Actually, the CEOs of the German and European banks could look forward to the new year in a rather relaxed manner. So far, the financial institutions have weathered the pandemic much better than feared. If Omikron does not turn out to be an extremely nasty surprise, the provision for bad loans should actually be enough to keep the corona risks under control.
All in all, there are also quite robust growth prospects and the justified hope that something in the ultra-loose monetary policy of the European Central Bank (ECB) could gradually change.
The surprising surge in inflation this year is basically good news for the banks, because rising prices will likely force the ECB to adopt at least a somewhat stricter course.
A key rate hike is still a long way off, but analyst estimates show how strong the leverage of a stricter monetary policy is on the results of the financial institutions. A rate hike by one percentage point would ensure that the profits of European banks are up to 25 percent higher.
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So the prospects for the industry are not that bad. Why then do supervisors like the Bundesbank’s deputy chief, Claudia Buch, or the head of the German financial supervisory authority Bafin, Mark Branson, urgently warn of dangers in the coming months?
The dose makes the poison
An important answer to this question can be derived from medicine. Some substances that are considered to be particularly healthy, for example some vitamins, turn into poisons above a certain dose. The situation is similar with interest rates for the banks.
If they rise moderately and, above all, in a controlled manner, then the industry is one of the big beneficiaries. However, if there is a sudden, uncontrolled rise in market interest rates, this can have rather delicate consequences, for example with real estate loans.
The financial institutions in Germany now grant around half of these loans with a fixed interest period of more than ten years. Business is booming – even during the pandemic. The risk would be all the greater if the banks suddenly had to refinance at significantly higher costs.
A sudden rise in interest rates would not only be difficult for banks: insurers and funds are vulnerable too. When long-term market trends tip, it rarely goes smoothly.
If 2022 really turns out to be the year of the monetary policy turnaround, it will hardly be possible without upheavals. This is exactly what the supervisors rightly have to respect, and banks should have that too.
More: Bundesbank Vice President Claudia Buch: “We are seeing increasing vulnerabilities in the financial system”