Raising rates will add 10 billion to banks’ income in 2023 just for keeping the money with the ECB.

The ECB’s increase in official interest rates added almost 10 billion in revenue to Spanish banks in 2023 just because the money was parked (excess liquidity, in financial jargon) in the Eurosystem (in our case the Bank of Spain and the rest of the central banks). banks of each eurozone country: Bundesbank, Bank of Italy or Banque de France).

During this inflationary crisis, financial institutions achieved record profits in a variety of ways, most of which were driven by the tightening of monetary policy by the European Central Bank (ECB). Meanwhile, families, non-financial companies and nations have suffered historic damage to their ability to consume or invest.

Together with the increase in interest margins (the business of money lending institutions) due to the rise in Euribor – also caused by an increase in the price of reference money to combat rising prices – and together with what they receive in the form of commissions, banks receive other income from financing activities ( for example, participation in the debt market). Among the latter, there is one that is safe and very well rewarded: leaving cash sitting idle at central banks.

In other words, banks have access to the best deposits (government deposits, by the way). In particular, on the interest rate of 4%, to which the ECB raised the “deposit line” from 0%, which was in July 2022 (at this link, the Bank of Spain explains the differences between the three types of official eurozone interest rates). . This is one of the most controversial consequences of his strategy of raising the cost of financing in order to strangle the economy and thus curb inflation.

Only since July 2023 have banks received anything towards their minimum reserve requirements (“1% of their customers’ deposits and other securities other than shares with a maturity of up to two years,” as the ECB itself explained). Previously, this money was also rewarded with a “deposit fund”.

All of the banks’ cash is reported on their income statement under the heading “Cash, cash balances with central banks and other demand deposits” as part of their assets. There, each organization collects minimum reserves, money that is stored in the Eurosystem (excess liquidity), and the rest it does not invest or lend. There is no further collapse. What we do know, as the data is published by the ECB, is that each country’s banks have overall “excess liquidity” in the “deposits” of their respective central bank.

These figures show that German financial institutions benefited the most from the facility in 2023, with combined extraordinary income of $46.6 billion (more data in the first chart, using ECB data). In Spain there were about 10 billion (other estimates, such as those of Zumara’s economic representative in Congress Carlos Martín Urriza, are somewhat lower than this figure).

Santander’s total revenue last year was 57.423 million; BBVA – 29.542 million; and Caixabank – 14,231 million. It is difficult to know how much of these individual amounts constitute “escrow fund” fees, even for industry experts.

Eric Dore, director of economic research at the IÉSEG School of Management, provides rough calculations for elDiario.es: “Caixabank has “cash, cash balances with central banks and other demand deposits” amounting to US$37.861 million. Probably most of them are in the Bank of Spain (this is different for organizations doing business outside our country, such as Santander or BBVA). Required reserves and excess liquidity must be separated in the deposit system. According to rough estimates, the required reserves amount to almost 4 billion million people. The amount payable on the deposit facility would therefore be approximately €34 billion and would generate annual interest income of €1,300 million.”

Request to increase banks’ minimum reserves

“Eurozone banks earn significant risk-free windfall profits in excess of €140 billion a year simply by depositing funds in the Eurosystem,” begins an open letter recently published by Positive Money EU, a non-profit organization that fights for a fairer and more equitable monetary and banking system.

“We call on the Governing Council (ECB) to consider reviewing minimum reserve requirements,” the letter further said. “It is of great concern that while banks receive 4% on the money they leave in the Eurosystem, their customers receive minimal reward for their savings,” says this public complaint, signed by experts such as Yuemei Ji of University College London ; Paul De Grauwe from the London School of Economics; Sebastian Diessner from Leiden University; Andrea Roventini from St. Ann’s High School; or Philipp Heimberger of the Vienna Institute for International Economic Research.

“As a result, ordinary households do not benefit from the high interest rates set by the ECB, but at the same time bear the costs associated with higher interest payments on their loans and mortgages,” Positive Money EU emphasizes. The case of Spain is reflected in the following graph.

“In 2012, the ECB lowered its minimum reserve requirements from 2% to 1%, setting a precedent that emphasizes the accommodative nature of policy in response to the macroeconomic context,” detailed economists who signed the letter. “In the current adjustment cycle, the institution chaired by Christine Lagarde has already taken a step to stop extraordinary earnings by introducing a zero remuneration on minimum reserves in July 2023,” he adds. “But this is just a small blip in the extraordinary transfers banks are receiving today.”

“These circumstances require a rapid and targeted increase in banks’ minimum outstanding reserves, which is consistent with current monetary policy objectives and contributes to the creation of a more stable and fair financial system in the euro area,” they conclude.

“We see how banks can park their liquidity in the deposit fund at 4%, but on the other hand, families who save are only rewarded between 0.12% and 1.9%,” he lamented. on the same lineCarlos Martín Urriza, representative for economy and finance of the parliamentary group “Zumar”, at the last meeting of the commission for economy, trade and business of the Congress of Deputies.

What is a deposit facility?

“The deposit fund is the mechanical level of interest rates in the eurozone as a whole,” sums up Professor Eric Dore. By raising it, the ECB encourages banks to make financing (mortgages, loans…) more expensive, above the level at which this base interest rate is set, in order to obtain greater profitability. “This is costly for the national central banks of the Eurosystem and is an undue source of profit for banks,” says this expert. “But this is a tool that the ECB has,” he explains.

“Now it is worth asking whether it was really necessary to raise interest rates on bank loans so much and damage aggregate demand (from families, companies…) in order to counteract inflation caused, in essence, by supply shocks, exogenous increases in the prices of energy and increased profits in some sectors. But that’s a different question,” he concludes.

1,400 million for sector tax

If everything goes according to plan for now, Spanish banks will make big profits in 2024. Banks will continue to pay industry tax. The tax was introduced in 2022 to tax the extraordinary profit growth of banks, including energy companies, late last year. The Royal Decree on anti-crisis measures was also extended this year. The sector has deplored the tax from the start and, although it has changed its tone against the government in recent days in presenting the results, it has been critical of maintaining it.

“There is no point in talking about exceptional advantages,” said José Ignacio Goirigolzarri, president of CaixaBank, this Friday. “The best way to improve the tax is to eliminate it,” he said of a hypothetical downward change to the tax, consistent with the one approved for energy companies. For months, the sector had argued that the tax would slow down banks’ lending, although this was largely due to higher rates. The former Bankia president himself admitted that “at this point it is impossible to know how much of an impact the tax had.”

Taking into account the last year’s results of these five banks, the state will receive 1,400 million euros in tax on the sector in 2024. To this we must add other organizations that have also suffered, such as Unicaja, Kutxabank or Abanca. . The tax only applies to activities in Spain, which generated €38 billion in revenue, up 25%, and €11,400 million in profit, up 47% from 2022.