Banking
ECB supervisors show dark side of higher rates for banks
Published by Jessica Weisman-Pitts
Posted on November 8, 2022
2 min readLast updated: February 3, 2026
Global Banking & Finance Review®
Company
Published by Jessica Weisman-Pitts
Posted on November 8, 2022
2 min readLast updated: February 3, 2026
FRANKFURT (Reuters) -Two European Central Bank supervisors highlighted on Tuesday some of the risks that banks face as borrowing costs rise and financial markets swing widely.
FRANKFURT (Reuters) -Two European Central Bank supervisors highlighted on Tuesday some of the risks that banks face as borrowing costs rise and financial markets swing widely.
With the ECB raising interest rates at a record pace, banks are looking forward to bigger profits after a decade in which low or negative rates and modest growth have depressed their margins.
The ECB’s chief supervisor Andrea Enria said most euro zone banks would do well if interest rates rose further, which typically means they can charge a larger margin when extending credit.
But he warned that some corners of the market would find things more difficult, notably lenders that are focused on consumers who may be reluctant to borrow as they struggle with a cost of living crisis.
Enria said an ECB review of a sample of banks found that most would generate bigger profits if interest rates increased by 200 basis points, even accounting for slower growth, while their capital buffers would only worsen marginally.
But he said banks exposed to consumers and the public sector would struggle more.
“Capital depletion would be higher for certain business models, such as consumer lenders and promotional and development banks,” Enria, who chairs the ECB’s supervisory board, told a German banking event.
In particular, a quarter of retail and diversified lenders would take a hit of more than 200 basis points to their Common Equity Tier 1 ratio, the ECB’s favourite measure of a bank’s capital, Enria added.
The ECB’s review also found that custodian banks, corporate lenders and promotional banks were particularly sensitive to a widening of credit spreads – an increase in the premium that lenders demand when they extend credit to weaker borrowers.
Speaking at the same event, Bundesbank board member Joachim Wuermelling said German banks were depleting their reserves for market losses and may therefore take a hit if asset prices continued to fall as rates rise.
“If securities prices continue to fall, this could increasingly have a bearing on banks’ income statements,” Wuermelling, who sits on the ECB’s supervisory board, said.
He urged banks to prepare “so that losses or provisions for expected losses don’t catch them by surprise”.
(Reporting by Francesco Canepa; Editing by Alex Richardson and Catherine Evans)
The European Central Bank (ECB) is the central bank for the euro and administers monetary policy within the Eurozone, aiming to maintain price stability and oversee the banking system.
Interest rates are the cost of borrowing money, expressed as a percentage of the total loan amount, which banks charge borrowers for loans or pay to depositors.
Consumer lending refers to loans provided to individuals for personal use, such as purchasing goods, services, or consolidating debt, typically involving credit cards and personal loans.
Capital buffers are extra capital that banks hold above the minimum required levels to absorb potential losses and ensure financial stability during economic downturns.
Financial stability refers to a condition where the financial system operates effectively, with institutions able to manage risks and absorb shocks without significant disruptions.
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