ECB’s de Guindos: Banks Sound Enough to Handle Balance Sheet Impact of Rising Interest Rates

20 December 2022

By David Barwick – FRANKFURT (Econostream) – European banks should be able to deal with the negative impact of rising interest rates, but must nonetheless take steps to be ready for possible side effects in the longer run, European Central Bank Vice President Luis de Guindos said Tuesday.

In a blog post on the website of the ECB under his name and that of Supervisory Board Chair Andrea Enria, de Guindos said that ‘[t]he ECB has increased policy rates by 2.5 percentage points and will raise them further to fight inflation.’

‘This will have a significant impact on bank balance sheets and profitability, and eventually on banks’ ability to provide households, small businesses and corporates with credit’, he said.

The ECB’s assessment is that ‘the banking sector is sound enough to handle the effects of rising rates on their balance sheets’, he said, but it ‘must prepare for potential longer-term effects related to monetary policy normalisation’ and in addition ‘should pay special attention to interest rate risk in their asset and liability management.’

One scenario considered by the ECB involved an increase of 300bp for the short-term rate and 100bp for the ten-year long-term rate, which de Guindos called ‘consistent with the need to bring down inflation more decisively in the short term, and an expectation of success in the medium term.’

The ECB also looked at a scenario involving a steepening rather than a flattening of the yield curve in response to a 100bp rise in the short-term rate and one of 300bp in the long-term rate, which he said ‘would be consistent with a fast decrease in inflation, accompanied by medium-term concerns about the world economy.’

European banks, according to the ECB’s analysis, ‘would remain broadly resilient to a variety of interest rate shocks’, he said, even with an economic slowdown next year potentially entailing a shallow recession akin to the latest ECB staff macroeconomic forecasts.