2023-08-13 05:58:46
Update
August 13, 2023
07:58
This decision is, in part, populist and blind, forgetting that the banks are under the supervision of the ECB. But it illustrates the beginnings of a larger phenomenon, namely growing state control of banks.
The Italian government has just decided to tax what it describes as the excess profits made by banks following the recent increase in interest rates. The measure may seem legitimate: banks can now place their excess liquidity at positive interest rates, while only slightly increasing the interest rate granted to depositors.
If the raw material of banks, i.e. customer deposits, is free, how would banks be allowed to profit from the windfall effect of being able to replace these deposits at a much higher interest rate, to the benefit of their shareholders and to the detriment of their depositors? This question is all the more legitimate since money is a public good, guaranteed by the States, andit is therefore indecent for banks to privatize profits on this collective good that is money.
The same debate animated the Belgian authoritieswhich ordered the banks to increase the interest rates associated with deposit books, even putting the banks in competition with the State which plans to launch State bonds at the reduced withholding tax rate.
The question is therefore whether the banks are really realizing the excess profits associated with this windfall effect of increasing interest rates that all central banks are implementing in order to curb inflation. The answer is probably yes, since some foreign banks are even buying back their own shares with the benefits of these interest increases.
Backtrack
At the same time, things have to be nuanced a lot. This requires going back in time, i.e. after the terrible 2008 banking crisis associated with subprime mortgages. This crisis was exceptionally serious and continued with the sovereign debt crisis in 2011-13. Some countries in southern Europe saw their interest rates rise on the grounds that their solvency was questioned by the financial markets. Greece had to benefit from a gigantic rescue financed by all the citizens of the euro zone. Behind this sovereign debt crisis, it was obviously the euro that was at stakesince cracks appeared in the cohesion of the monetary zone.
The ECB went further by imposing negative interest rates on excess money that banks were unable to lend. (…) This resulted in indisputable accounting losses for the banks.
At that time, the ECB had to, in total contradiction with its founding principles, refinance States whose public debt began to flare up. This refinancing consisted in the acquisition by the ECB of sovereign debt in return for a unimaginable coin issue in the light of numismatic history.
So we turned the printing press, in reference to the old technical process for printing banknotes. This monetary creation caused interest rates to fall, but the ECB went further by imposing negative interest rates on excess money that banks were unable to lend. However, banks were not allowed to impose negative interest rates on regulated deposits. In Belgium, all the banks therefore reduced the interest rates on their customers’ deposits to the minimum rate, ie 0.11%. This resulted in undeniable accounting losses for the banks.
Maturity Transformation
More this drop in interest rates also allowed banks to grant loans at extremely low interest rates, both individuals and businesses. Just think of the fact that some mortgage loans were negotiated at an interest rate of less than 1%. This deadline transformation, that is to say that the banks grant loans with longer maturities than that of their clients’ deposits, was not insignificant. Besides, she was particularly favorable to the States themselves who were able to finance themselves at homeopathic interest rates, not only from the ECB, but also from banks and insurance companies.
Rising interest rates change this situation since banks can now lend at higher interest rates, but this reality only applies to the production of new credits. Indeed, this increase in interest rates is not imposed retroactively on old loans with a low interest rate. Banks therefore do not transform their balance sheets instantly, but at the rate of the renewal of their credits. The rate of credit changes to their assets is slower than the ability to change the interest terms of their depositors.
It is impossible that such a level of public indebtedness, moreover fragmented according to the Member States of the euro zone, does not lead to an accentuated nationalization of the banking sector.
This dynamic is essential, because it explains that if there is a windfall effect, it is only partial. Moreover, it disappears at the rate of the normalization of the level of interest rates.
Creeping statehood
So what about the taxation of Italian banks? It is a tax that hits these companies, and therefore their shareholders. The best illustration is that the share price of these banks, but also of all European banks, has fallen by capillarity effect. But since it’s a tax that hits the interest margin of these banks, one way to avoid it would be to increase the interest rate offered to depositors. These Italian banks apparently have the choice of paying a tax or increasing the remuneration of their depositors.
Is this a healthy measure? She is, in part, populist and blind. She forgets that the banks are under the supervision of the decisions, good or bad, of the ECB. But, in my view, it illustrates the beginning of a larger phenomenon, namely a growing state control of banks.
This latent nationalization will impose itself as much by necessity as by ideological choice. It will not be effected by an expropriation of the private shareholders of these financial institutions, but by the authoritarian allocation of their assets, the origin of which comes from savers’ depositsthemselves emanating from the monetary creation of the central banks, towards the financing of the public debt.
This will, of course, result in a structural reduction in the profitability of these institutions., since they will become permeable to the remuneration that States wish to grant them. Is this a plausible scenario? I believe so, because it is impossible for such a level of public indebtedness, moreover fragmented according to the Member States of the euro zone, not to lead to a accentuated nationalization of the banking sector.
Nothing suprising
The monetary confrontation between a vertiginous increase in credit – the financing of which can no longer be ensured except by monetary creation, by pushing its momentum ever further – can only lead to a structural modification of savings circuits.
The Italian government would have been better advised to negotiate with its banking sector its contribution to the financing of the Italian public debt.
Should we be surprised? Not at all. Money is consubstantial with the authority of States. It echoes the payment of taxes, the two sovereign rights – namely that of minting money and levying taxes – being the obverse and the reverse of the same reality, reflected by the phrase “Monetandi jus principum ossibus inhæret” (the right to coin money inseparable from sovereignty) which recalls the state guardianship of the currency over all the debts and claims of citizens.
In conclusion, the Italian government would have been better off negotiating with its banking sector its contribution to the financing of the Italian public debt, the level of which is excessive, rather than imposing a short-term and probably counterproductive measure.
Bruno Colmant
Member of the Royal Academy of Belgium
1691962884
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