The key interest rate of the banks has been increased. How should this be evaluated?

This is over my head. A negative value - so the banks actually get paid as a reward for borrowing money from the central bank - or have money taken away if they leave money there and don’t withdraw it? But I also have to admit that I have never really dealt seriously with the topic of the key interest rate.

Banks have to pay interest when they deposit money at the central bank (although I do not know if this also applies to the minimum reserves that banks MUST hold). The ECB/central bank is a "safe haven" for the bank when it comes to temporarily investing “excess money.” In the crisis, banks restricted their loan commitments to a minimum to keep risks as low as possible. This led to the economy hardly or only with difficulty accessing loans and the economy was stifled. In my opinion, this point has already been resolved - as far as acceptable for the individual bank. A bank wants to do business, so it also grants loans at an acceptable risk.

With the negative interest rate on central bank balances, the central bank wants to ensure that banks give out more loans. However, for the bank, this is a double-edged sword. With “normal” customers (based on creditworthiness) it would grant loans anyway. If the bank wants to increase loan issuance to avoid the penalty interest on balances at the central bank, it may have to take on riskier commitments that it would otherwise have rejected. This naturally affects the equity capital (for almost every loan a percentage X of equity capital must be held - the higher the risk, the higher the capital requirement) as well as the bank’s risk profile (more risk in loans = higher default risk = more overall risk = higher risk of a bank failure [although appropriate provisions should already be made here]).

The point is: It is not as simple as politics and central banks make it out to be.

(whether this also applies to the minimum reserves that banks MUST deposit, I do not know, however).

No, it does not apply to that. I am the (address) risk controller here, now they want to take away my job as well. But f-PNo has nothing more to add.

With the negative interest rate on central bank deposits, the central bank wants to achieve that banks grant more loans. However, for the bank, it is a double-edged sword. For "normal" customers (regarding creditworthiness), it would grant loans anyway.

Despite the negative interest rate, I still have the feeling that some banks (including our largest bank in Germany) are so inflexible when it comes to granting loans to even well-performing companies. Absolutely no risk-taking. Best to provide 300% collateral, plus additional security through SAB or guarantee banks, etc. In our case, these are no longer even working capital loans, but mostly real estate financing. There are then actually proposals suggesting that, in addition to the land charge, one should also deposit money with the bank as security.

I imagine the look in the eyes of a homebuyer when told: You will get a €200,000 loan from me at 2% interest if you deposit €50,000 with us at 0.05% for the entire loan term.

PS I just realized that building societies work similarly :D

Hello D´Artagnon,

I imagine the eyes of a homebuyer when they are told: You will get €200K credit from me at 2% interest if you invest €50K with us at 0.05% for the entire loan term.

That’s the thing with the umbrella and sunshine... imho nothing new.

Although I would like to understand some decisions by bankers *today* as a friendly hint to potential homebuyers to reconsider the idea of building a house/buying real estate (due to lack of income/equity).

Rhenish regards

I am the (address) risk controller here, and now they want to take my job away from me. But there is nothing more to add to f-PNo.

Even though it says Compliance Officer, it’s not just Compliance Officer. We are a small bank and I am the man responsible for many areas. Hm - should I put a laughing or an angry smiley now.