The Bank of Spain expects banks to make credit more expensive and increase the remuneration of deposits

MADRID, 26 Jul. (EUROPA PRESS) -

The Bank of Spain anticipates that financial institutions will begin to increase the remuneration of deposits in the coming months to compete for fundraising, while continuing to transfer the rise in interest rates in the euro zone by the Central Bank European Union (ECB) to the cost of loans to households and companies, which has so far happened to a lesser extent than in previous episodes of rate hikes.

This is stated in an article published this Tuesday, which concludes that the transmission of the recent increase in market reference interest rates to the average cost of new loans to families and companies is being slower than in previous episodes of rate hikes , a difference in transmission dynamics to which the containment of the cost of some liabilities, such as private sector deposits, could be contributing.

Between December 2021 and May 2022, short-term interest rates on loans for house purchase (fundamentally variable rate) rose 22% of what the 12-month Euribor rose in the same period, compared to the 58% observed during the first five months since the start of the 2005 rise episode.

In long-term interest rates (fundamentally fixed rate), the pass-through was 13% in relation to the changes in their reference rate (20-year IRS), when in the last selected cycle (2010) there was a translation by the same proportion.

In the case of companies, medium-term interest rates for the credit segment of up to one million euros increased by 25% of the variation observed in the three-year IRS during the same period, compared to 58% 2005. In the segment of loans of more than one million euros, the increase was 12% compared to the reference rate, which contrasts with 41% in 2005.

From the analysis of these data, the Bank of Spain article concludes that the transmission of market interest rates to those of bank loans is being slower than in previous episodes of increases in interest rates, which could respond, in part, to the lower pressure that the cost of bank deposits has experienced so far, which is the main source of financing for financial institutions.

Along these lines, it points out that, unlike what happened in 2005, the remuneration of customer bank deposits has not increased in response to the increase in interest rates on the money market.

"This stability is surely explained by the lower fund needs of financial institutions, in a context in which they have high liquidity ratios and with a weight of deposits over credit that exceeds 100%, well above of the 2005 records. Likewise, the current lower competition between banking entities compared to past cycles (...) could also have contributed to reducing the speed of transmission of interest rate increases to the cost of deposits banks", they explain from the supervisor.

The Bank of Spain expects that the transfer of rates to the cost of credits will continue in the coming months, in which it predicts that financial institutions, competing for fundraising, will begin to increase the remuneration of deposits.

On the other hand, the article published by Laura Álvarez and Pana Alves, from the General Directorate of Economy and Statistics, and by Javier Delgado, from the General Directorate of Financial Stability, Regulation and Resolution, maintains that the average cost of issuing bonds by Spanish companies increased by just over 200 basis points between December and June, reaching 3.9%, which contrasts with the more moderate variations in the average costs of new loans to families and Business.

As a result of the fact that the cost of bonds "has increased sharply" and that the cost of bank financing for larger companies "has continued to decline", in financing for productive activities, large companies with access to capital markets capitals would be substituting financing with fixed-income securities for bank financing.

In addition, the supervisor adds that the increase in uncertainty caused by the war in Ukraine and the increase in production costs could be leading companies to accumulate liquidity buffers, resorting to lines of credit.

Thus, the raising of funds through issues of fixed-income securities fell "intensely" in the first four months of 2022, although it picked up again in May, while the volume of new bank loans for an amount greater than one million euros showed "a high dynamism".

In the case of new bank loans for an amount of less than one million euros, the increase was more moderate and continues to be below pre-pandemic levels, due to the less favorable evolution of supply and demand in the segment of financing granted to SMEs.

The Bank of Spain article also echoes the main results of the recently published Bank Loan Survey, which concluded that during the first half of 2022 there was a tightening of financing conditions for companies and households and the supply of loans contracted due to the greater risks perceived by financial entities and their lower tolerance for them.

In addition, banking entities anticipated, in June, a general contraction in credit supply for the third quarter, which would be more intense in the case of financing for SMEs.

Despite the deterioration of the macrofinancial environment, the Bank of Spain has confirmed that the credit quality of the portfolio of deposit institutions has continued to improve in general, except in the case of financing for the branches of activity most affected by the pandemic , and in all the operations that have the endorsement of the Official Credit Institute (ICO).

In any case, he has warned that the materialization of adverse macro-financial scenarios "could lead to less dynamism in the volume of bank credit and a deterioration in its quality in the coming quarters".