ECB apparently wants to limit banks’ windfall when interest rates are raised

(Bloomberg) The European Central Bank is looking into ways to prevent banks from reaping unjustified profits from the subsidized lending program launched during the pandemic once it hikes rates at the end of the month, according to a report by the Financial Times (FT).

In order to avoid a credit crunch, the ECB had granted banks subsidized loans of 2.2 trillion euros during the Corona crisis. With the increase in interest rates, institutions in the euro area can expect additional profits of up to 24 billion euros, as the FT reports, citing analysts.

The Governing Council wants to discuss how to curb the extra margin banks could earn by depositing it back with the central bank, according to FT. In its report, the newspaper refers to informed circles.

The ECB is planning its first interest rate hike since 2011 and already in June gave details of the planned interest rate hikes in July and September, which are to be followed by others. Giving banks tax-financed profits while raising the cost of borrowing for households and businesses would be “politically unacceptable” for the ECB, the FT reports.

The foreseeable end of negative interest rates is likely to give the banks in the currency area the largest increase in their interest income in seven years. According to analyst estimates compiled by Bloomberg, the 10 largest listed credit institutions in the euro area will see their net interest income rise by 3.7% this year.

Institutions from ABN Amro Bank NV to Commerzbank AG and Deutsche Bank AG to Societe Generale SA have already signaled the boost to be expected from higher interest rates.