Wednesday

21st Feb 2024

ECB president grilled over €135bn interest payout to commercial banks

  • ECB president Christine Lagarde said the "question of remuneration" had not been discussed by the bank's governing council (Photo: Council of the EU)
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MEPs criticised European Central Bank (ECB) president Christine Lagarde for paying out massive profits to commercial banks at the expense of European taxpayers and national budgets.

As part of the fight against inflation, the ECB has raised its interest rates increasing the cost of borrowing and the attractiveness of saving money. In the current monetary system, households and businesses store their savings with private banks. These banks, in turn, have accounts with the national central banks within the Eurosystem, over which they now receive interest payments.

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This means that under the current 3.25 percent deposit rate, the ECB is set to pay €135bn in net interest income to commercial banks on the accumulated reserves they deposited with central banks (a little over €4 trillion collectively).

"It is an extraordinary act of generosity towards bankers at the expense of taxpayers," Socialists and Democrats MEP Paul Tang told Lagarde in a debate held by the economy committee of the European Parliament on Monday (5 June).

Even though it is unlikely that central bank losses will have to be covered by taxpayers directly, as central banks can print money to make up for the loss, it does affect the national budgets.

Under normal circumstances, central bank profits are paid out as dividends to treasuries. However, due to the high payout to commercial banks, nothing will go to governments.

When asked whether the ECBs governing council had debated the issue, Lagarde said that the "question of remuneration" had not been discussed at any recent governing council meetings.

In fact, the remuneration of commercial banks may rise further if the ECB decides to increase its deposit facility again, which most analysts predict will happen at the next governing council meeting on 15 June.

To get a sense of the scale of the remuneration: the entire EU budget for 2022 was approximately €186bn.

There are alternatives

Some felt this unfair as European bank earnings reached a 15-year high last year. According to the London School of Economics professor of economy Paul de Grauwe, the current policies constitute a bank subsidy.

In a recent article published on the Centre for Economic Policy Research website, a non-profit for economic research, de Grauwe has proposed an alternative system which would increase the minimum reserve requirement for commercial banks — a frozen sum over which no remuneration would be paid.

When Tang and Greens MEP Henrike Hahn asked Lagarde whether she would consider altering the remuneration policy, Lagarde said that "the ECB is not even thinking as to whether its [policies are] generous or not generous." The fact "that reserves are remunerated at the deposit [rate] is a byproduct of the monetary policy measures that we have to take," she added.

"It is disappointing that the ECB refuses to engage in a debate over such excessive subsidies that disproportionately burden the taxpayers without explicit legitimisation of the European Parliament," Hahn later told EUobserver. "I invite the ECB to adapt its policies quickly."

One of the criticisms levelled at the ECB is the fact that between 2019 and 2022, when interest rates were negative, the ECB exempted commercial banks from paying those negative interest rates on their excess reserves with the ECB. However, the reverse is not true now interest rates have suddenly been increased.

"There is no good reason why a similar mechanism cannot be implemented now in the opposite direction to counteract the windfall profits currently enjoyed by banks," Jordi Schröder, who is a researcher at Brussels-based non-profit Positive Money, told EUobserver.

But according to Lagarde, the "only" thing the ECB is looking at is whether its policies aimed at price stability are transmitted by the market.

The ECB has three main interest rates: for lending (which is at four percent), for refinancing (at 3.75 percent) and for deposits (which, as mentioned above, currently sits at 3.25 percent).

By raising rates, it expects that commercial parties will 'transmit' these rates to their customers. So far, commercial banks have only increased borrowing rates along with the ECB's baseline. However, interest rates on savings accounts (deposits) have barely been raised by commercial banks and remain near zero [see the dark orange line].

So while commercial banks benefit from a 3.25 deposit rate on their excess reserves, businesses and households only receive slightly above zero percent according to the ECBs most recent Financial Stability Review published on 31 May, with commercial banks pocketing the difference.

"We would like it if they would transmit rates on both sides," said Lagarde, but indicated the ECB is not undertaking any action to this end.

Added a quote from Positive Money and Henrike Hahn on Tuesday.

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