How the ECB Will Force Banks to Raise Deposit Rates

The monetary policy of the EU it seems at the moment to be on the one hand ineffective, on the other hand leading to a dead end causing negative effects on the economy, with no benefits for anyone except the banks who will see their profits increase from the increase in loan rates while they do not increase deposit rates. As far as the banking system is concerned, what is happening is that the commercial banks, taking advantage of the increase in the ECB’s key interest rates, are increasing the interest rates on new and older loans that have a floating interest rate, but they are not increasing deposit rates. This way they will be able to make very large profits while the economies are going into recession. Borrowers, individuals and businesses, will be burdened with increased costs of servicing their loans, while depositors will not benefit. This behavior of the banks is due, on the one hand, to the limited number of banks in each member country, such as in Greece, Portugal, etc., which reduces the competition between them for attracting depositors or for granting loans. The result is that interest rates for Greek depositors are kept at zero, when e.g. in England they already reach 3%. But on the other hand, the ECB itself is responsible for the banks’ tactics, because it lends them lavishly at a humiliatingly low interest rate in the context of supporting the banking system that began with the pandemic and the lockdowns of the economies. Because it offers them such cheap money, banks don’t need depositors to find money, so they don’t need to raise deposit rates. Things get even worse because the banks deposit the money they get from the ECB and the money they deposit into the ECB itself, automatically making a risk-free profit and even damaging the ECB. It is obvious that the responsibility for this situation belongs to the central banks and specifically to the ECB, which must stop lending to the banks at such a low interest rate on the one hand, and on the other hand it must stop paying their deposits dearly. This problem is now being considered by the ECB, but there are currently legal problems that need to be resolved before it can proceed with a policy change towards commercial banks. According to estimates by Trust Economics (https://trusteconomics.eu), European commercial banks will reap uncut and risk-free profits of €30 billion, just from this “failure” of the ECB. Moreover, by depositing the money with the ECB at a profit, the commercial banks are not doing their main job of lending to the economy. They prefer to deposit them with the ECB rather than take the risk of the loans and thus withhold their financing. According to Trust Economics, it is unthinkable for the ECB to support the banks with money ultimately paid by taxpayers, when borrowers are faced with increased loan rates and all citizens with the excessive cost of living caused by inflation due to the energy crisis. On the other hand, Trust Economics explains that even if the ECB stops funding banks, they will not raise deposit rates because they do not need additional deposits. And this is because deposits are much more than loans and they “stagnate”. Until they are reduced, which will happen sooner or later as the high cost of living forces citizens to “eat from the ready”, i.e. from their savings, deposit rates will not increase. ECB branches in specific member countries are aware of these problems, but have no power to intervene in commercial banks to pressure them to raise deposit rates. He believes that only the competition between them will force them to compete for deposits by increasing the interest rates they offer. On the other hand, he recognizes that when you have only a few banks (oligopoly), competition is limited. That is why, and as can be seen from its actions, it is trying to create the prospect of increasing the number of large banks in each member country, with the merger between non-systemic banks in order to increase competition. In any case, however, if the ECB corrects its mistake and limits cheap loans to commercial banks, while making it difficult to deposit this money in its own deposit accounts, perhaps the problem will be solved faster. The fact that banks are not raising deposit rates also works against the euro. The ECB justifies its interest rate hike by saying that in addition to fighting inflation, the increase also supports the euro’s exchange rate. But this goal is not achieved if the banks do not increase the deposit rates they offer. Because if the deposit rate does not increase, the attractiveness of the currency will not increase either.