Not everything that shines is gold. This rise Interest rates are not always beneficial. banks. Although it means exiting the negative zone in terms of the price of money, as it was last year, an improvement for your marginsAfter several years of having to generate income through asset management and commissions, the current interest rate hike amid industry uncertainty fueled by the Silicon Valley Bank of America (TYD) and in Europe it could also be inefficient for the industry due to the financial situation of Credit Suisse.
What happens with bank financing?
Until recently, the flow of credit was easy, especially until the European Central Bank (ECB) started raising interest rates last July to fight inflation. consumption and more nourishing price increase. Although it may seem like it, the ECB’s interest rate hike does not only bring advantages to the banking sector. improve margins as loans are more expensive (the fee they charge for lending) and holding deposits without significant increases (the amount they pay for savings). Such a measure makes wholesale financing more expensive by the banks, that is, they have to ‘buy’ the money at a higher price. This means that thanks to the liquidity limits put in place by the monetary authority, they have to pay more to the ECB to lend themselves money after saving for free during the pandemic period. Obviously, it should be passed on to customers as: less access to credit and more expensive new loans. In short, this situation hurts especially those who have to borrow money or have variable interest loans.
What could happen to the loan?
Until today, guilt In banking, that is, the credit defaults of individuals and companies have been kept at a distance, as emphasized by financial institutions. But if the price of money continues to rise, that is, if the ECB continues to raise interest rates, the default rate could be triggered above, which was around 3.9% last year, according to a study by consulting firm EY. 4% This is one of the main conclusions of a report by the consultant on the future development of loans, released on Monday. This, in turn, will reduce the volume of financing provided to companies and families, as prudence and provisions will prevail. All this slows down economic growth and therefore should cool the economy, i.e. reduce inflation.
In any case, the increases in interest rates have been transferred to the one-year Euribor, which is the main reference for interest rates. the mortgage variable rate4%, which was negative until April of last year, began to caress. This changed the mortgage profile and caused fixed-rate mortgages to hit a record high last year and are now starting to decline. Euribor has been relieved recently on the expectation that the ECB will soften the increase in money prices in order to prevent the decline of other financial institutions, given the banking crisis that started in the US last week after the SVB crisis. aimed at tightening monetary policy. Otherwise, this indicator could return to its upward trajectory, exceeding 4%, making it even more difficult for variable mortgage holders to be overwhelmed.
What about public debt?
One of the investors’ fears is the impact of an increase in interest rates. at the price Public debt. As the price of money rises, the price of bonds falls because their development is reversed. Banks have portfolios of such assets that are paid at prices higher than current prices. This is one of the problems that led to the closure of Silicon Valley Bank (SVB) in the US: due to reputation problems, it had to sell a huge portfolio of public debt that it had bought at higher prices to stop deposit run-off, and it was highly concentrated in the US. technology sector.. The situation of Spanish banks is very different. in addition to having more diversified businesswith different types of customers from every sector, from families to companies, and diverse business portfolio (credit, insurance, investment management, private banking for high net worth individuals, corporate banking for companies…), public debt portfolios on average only make up about 13% of their balance sheet (compared to 50.6% for SVB) . . . In contrast, most are held-to-maturity (77% of the total). The market value portion also has shorter maturities than those of the SVB, so losses caused by the assets of the organizations at such times as current are more automatic and controlled. In addition, guaranteed deposits – up to EUR 100,000 per person and per customer – are rising to an average of 66% in Spain (more than 90% were excluded in SVB, so the authorities have announced that they will provide it). European regulations are also more demanding, so supervisors may impose more liquidity requirements on banks in the eurozone. One of the problems in the US is that midsize and regional organizations have less control due to a decision taken by the Donald Trump administration, which the US is now reconsidering.