With the increase in ECB rates, wealth passes from states to commercial banks
A secondary, but not indifferent, phenomenon occurred in the redistribution of central bank remuneration due to the new monetary policy. Recent interest rate hikes have important implications for central bank profits and losses: major central banks pay interest on commercial bank bank reserves (held at the central bank), interest rate hikes also lead to higher interest payments by central banks to these commercial banks.
Take the example of the Eurosystem: Bank reserves held by credit institutions at national central banks and the ECB amounted to €4.6 trillion at the end of 2022. In December 2022, the interest rate on bank reserves held by commercial banks was raised to 2%. This means that the Eurosystem will pay 92 billion euros in interest to lenders in 2023, whereas before, with negative rates, it was even squeezing resources from these lenders. These interest payments are likely to be even larger as the ECB announces further interest rate hikes.
One way to give an indication of the size of these interest payments is as follows. The €92 billion extra interest paid to banks means that the Eurosystem will have to reduce its profit transfers to national governments, via national central banks, by €92 billion. This loss of national government revenue amounts to 0.75% of euro area GDP and will lead to an increase in the budget deficit, necessitating further fiscal austerity in the future. Given that the short-term interest rate is likely to be raised further, fiscal tightening is likely to reach 1% of euro area GDP in 2023. And this will likely happen when the euro area enters a recession .
In reality, the payment of interest by central banks to national banks is, in some way, a holdover from the past, when central banks were nothing more than commercial banks chosen by the state to perform treasury functions, so they still continued to behave as credit institutions. However, the payment of interest to commercial banks reinforces the effect of monetary policies in a distorting way, given that the resources available to national states are reduced. Perhaps it would be appropriate to rethink the remuneration regime of commercial banks and, in general, the regime of deposited reserves themselves, so as not to make the fallout from monetary policies excessive or even desired.
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The article With the increase in ECB rates, wealth passes from states to commercial banks comes from Scenari Economics .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/con-laumento-dei-tassi-bce-la-ricchezza-passa-dagli-stati-alle-banche-commerciali/ on Fri, 20 Jan 2023 09:00:01 +0000.