FRANKFURT (Reuters) – The European Central Bank is in the final stages of raising interest rates, European Central Bank Deputy President Luis de Guindos told an Italian newspaper, while warning that higher borrowing Costs could weigh on banks’ asset quality, even if metrics have remained healthy so far.
The ECB has raised interest rates by 375 basis points since July last year and has committed to further hikes, but at a more cautious pace 25 basis point increment, after a sharp early swing in its tightening campaign.
“We are now in the final phase of the monetary policy tightening path,” de Guindos was quoted by Il Sole 10 Ore on Sunday. “That’s why we’re getting back to normal, at 25 basis point pace.”
These rate hikes have boosted lending margins for banks, but It may also make it harder for some borrowers to repay their debts, raising the proportion of non-performing or non-performing loans.
“Currently, the improvement in margins is more than enough to cover potential losses from growth in non-performing loans,” de Guindos said.
“The combination of slowing economy and higher interest rates will lead to higher funding costs for banks and possible increase in non-performing loans.”
European Central Bank Supervisory Head Andrea En Ria told Croatian newspaper Vecernji list earlier that the ECB was seeing “some early signs” of delays in loan payments, an indicator that non-performing loans could rise.
“Let’s not expect a wave of bad loans, but this is not the time to be complacent,” added de Guindos.
De Guindos also warned that so-called shadow banking — a category of banks that includes non-bank financial companies such as funds or insurance companies — are experiencing “some tension” given their high leverage and more exposure to liquidity risk.
de Guindos said, providing the ECB’s preliminary estimate of the impact of quantitative tightening or reducing banks’ large holdings of government debt this makes 10 yr Government bond yields increased by 25 and 70 basis points, with rate hikes having the bigger impact.
