Interview with De Standaard and La Libre Belgique

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Ruben Mooijman and Ariane van Caloen, on 23 November 2023

29 November 2023

Please note that the interview was conducted in English and translated into Dutch and French. In case of discrepancies between the versions, the English version prevails.

What would you say to those who think that banks are making excessive profits?

The ECB’s latest Financial Stability Review, which has just been published, indeed shows that bank profitability has risen sharply. This improvement can be attributed to the widening of interest rate margins. The return on equity of euro area banks now stands at around 10%, whereas in 2019, barely five years ago, it stood at 4%. So it has clearly improved.

Still, this is something of an illusion − it is after all a short-term improvement. In the long term, we expect profitability to fall again. Why? There are several factors. First, the economy is slowing, which will lead to higher default rates and a decline in asset quality. Second, banks will have to pay more to attract deposits. On term accounts, for example, interest rates have already risen sharply. Likewise, the bonds that banks issue themselves will need to carry a higher return. So overall the cost of bank funding is on the rise. And finally, an often-overlooked factor is that demand for credit is falling. Putting all that together, you can see that high bank profitability is not sustainable. In fact, the financial markets are already convinced of this, as bank share valuations are in no way reflecting expectations of high profits.

Are the banks sufficiently covered for interest rate risks. If not, could the regulator, the ECB, review its requirements?

The interest rate risk of European banks can’t be compared to that run by some US banks such as Silicon Valley Bank with a different business model. The repricing of loans, in other words, raising interest rates in line with the market rate, has been much faster than the repricing of deposits in Europe. However, the interest rates on deposits will also increase at some point.

So is interest rate risk adequately covered?

Yes, but at the same time banks will be facing a loss of profitability as I said. I am talking about the average for the sector.

There has been a lot of debate about interest rates on savings. Politicians are taking initiatives to get banks to raise interest rates. Is that a good idea?

If the ECB raises interest rates, it is for borrowers and savers. Lending rates have risen and the remuneration of deposits is expected to follow suit. The remuneration on savings accounts should reflect our interest rates. That is part of our monetary policy transmission. Because if savings become more attractive, consumers will spend less, reducing demand. This is what we aim for to push down inflation. However, we now see banks are delaying passing on higher interest rates to savers. They can do that because they still benefit from abundant liquidity right now. But we are also taking measures to reduce excess liquidity, so that higher interest rates on savings accounts will become a reality – sooner or later.

Do you see differences between member states in this respect?

Yes, there are differences. In some countries, banks are quick to adjust interest rates on deposits, and in others, such as Spain, they are lagging behind. Euro area banking sectors also differ in the way mortgage loans are granted, whether it is at variable or fixed rates. Strengthening of profitability was particularly notable for banks in countries where variable-rate lending predominates and the pass-through of higher policy rates to deposits has been slower.

And Belgium?

I know the Spanish situation because it’s my own country, but we look at euro area averages and developments as a whole.

Some economists criticise the system that allows banks to make money easily by depositing their excess liquidity with the ECB. This is resulting in generous profits at the moment because interest rates are rising. What’s your take on this?

The ECB has raised its interest rates with a view to these increases being passed on to all remuneration categories in bank balance sheets. The level of liquidity in the market was extremely high and had to be reduced. This reduction is under way now and will go hand-in-hand with a decline in these types of revenues for banks.

You have also changed the remuneration of the minimum reserve requirement for banks. Some bankers believe that this should be raised to ensure a stronger capital base. Do you think that’s a good idea?

We have indeed set the remuneration of banks’ minimum reserves to 0%. The levels of those reserves have so far not been changed or discussed. I know some central bank governors are in favour of increasing them. We have limited the remuneration on the minimum reserve requirement, which is equivalent to approximately 1% of banks’ liabilities. I understand that remuneration of reserves is important for some banks, but monetary policy shouldn’t be driven by the financial position of banks or the profits of the central banks. Our objective is to bring inflation back to our target.

National central banks are going to have to report significant losses owing to the policy of quantitative easing, which led to huge purchases of sovereign bonds to inject liquidity into the market. Do these losses pose a problem?

It’s true that central banks are currently reporting losses owing to the hike in interest rates, but if we look at a longer period of time, for instance over the last 10 years, the net outcome is positive in terms of central bank profits.

What about the real estate market? People are complaining about the higher cost of loans. What would you say to them?

What is happening is part of our monetary policy. The sharp rise in interest rates is starting to dampen real estate prices. This is more apparent in some countries than others, but a moderation in price trends can be seen everywhere. On average, house prices are stabilising. The decline in commercial property prices is much more pronounced.

Does the situation pose a danger?

It could affect banks, but fortunately they are less exposed to commercial real estate than they are to residential real estate. Commercial real estate is more often financed through other channels, such as mutual funds. But in the financial system there is a high degree of interconnectedness, so we look at the overall picture.

Huge investments are needed to make homes and other buildings climate-proof. Are the higher interest rates delaying funding for investments aimed at combating climate change? Could that slow down the climate transition?

It’s true that substantial investments are needed, but I think they should mainly be financed through subsidies and European funds like the Next Generation EU. This is a matter for fiscal policy. That doesn’t alter the fact that the ECB conducts monetary policy by increasing or decreasing rates without discriminating between sectors or borrowers.

Monetary policy also affects the climate transition in other ways. Some investments are being jeopardised by higher financing costs. This has already resulted in plans for various wind farms being scrapped.

The ECB pays close attention to climate policy, but for us it’s a secondary objective. It’s national governments that play the leading role in climate policy, through taxes and subsidies. We can contribute though – and we do. For example, we prioritise climate-friendly companies in our corporate bond portfolio. This is a small contribution, but it sends a clear signal in the fight against climate change.

The ECB is preparing to introduce a digital euro. Why is that necessary?

We currently have a physical euro in our wallets, whereas the world we live in is becoming increasingly digital. There is a very natural evolution taking place from a physical to a digital euro backed by the central bank. We see the digital euro as a means of payment. We would be able to use this form of public money to pay for our shopping, our bill in a restaurant or all sorts of purchases. Like banknotes, the digital euro will not have to be remunerated. There will be a limit on the amount of digital euro people can hold, to avoid endangering the stability of the banking system. This means that the digital euro won’t compete with current accounts. That is a very clear message we want to send to the banking sector. The digital euro will not be an investment product but a simple means of payment to complement banknotes.

Won’t implementing the digital euro be very expensive for the ECB?

This will be part of our calculations during the preparation phase over the next two years, a cost-benefit analysis will be conducted but, in my view, the benefits will outweigh the costs. It will offer another alternative means of payment to those living in the euro area. It will also enable us to take another step towards European strategic autonomy. And at the end of the preparation phase the decision will be taken by the European Commission, the European Council of the European Union and European Parliament.

A number of countries, including Belgium and the Netherlands, are struggling with how inflation is measured. The way it’s measured means actual inflation is sometimes overestimated and sometimes underestimated. Isn't that a problem for the ECB, as it’s tasked with fighting inflation?

Indeed, changes in the methodology of how energy prices are measured temporarily affects how the inflation rate is calculated. But that's a matter for Eurostat, not the ECB, and changes aim at improving the accuracy of inflation measurement going forward. Statistical changes to the compilation of the Harmonised Index of Consumer Prices (HICP) occur from time to time. A discussion on methodological changes also applies to whether we include house prices in the inflation rate or not. As you know, that was one of the conclusions of our monetary policy strategic review. We work and share information with Eurostat on that topic, with a view to enhancing the HICP. But not on the measurement of energy prices, which is a statistical choice to how the country’s price index is compiled.

Europe is planning to use the profits from frozen Russian assets held by Euroclear to help rebuild Ukraine. The ECB is critical of this. Can you explain why?

Let me first clarify that the ECB is in favour of helping and supporting Ukraine in any way possible. But our position on utilising the dividends and interest from the frozen assets is clear. First: this should be a global decision, ideally involving all members of the G7. In addition, we have to be careful because this could lead to reputational damage. We have to look beyond this conflict in isolation, and there could be implications for the euro as a safe currency. The euro is the second most important currency in the world, and we have to consider its long-term reputation. I think there are other ways to finance the reconstruction of Ukraine.

In Belgium, the launch of the ethical bank NewB has proved very difficult. Are barriers to setting up new banks in the eurozone too high?

Without entering into the details of any particular case, there are different procedures to be followed and criteria to be met, but there are no limitations beyond the legal and capital requirements imposed for the creation of a new retail bank.

But there haven’t been very many new banks in the last few years...

Because there are a lot of banks in the euro area! The real question to ask is about banks’ traditional business model. New sources of revenue need to be found, the number of branches has to be reduced. I suppose that investors are turning away from banks because the level of profitability doesn’t meet their expectations. I think there needs to be further cross-border consolidation.

So are there too many banks?

Given the cost structure of European banks, consolidation could help provide a solution. Above all else, I think cross-border consolidation in the euro area under a single supervisor and within the framework of a single monetary policy would be positive.