Regulation / banks

Growing pressure on margins in the German banking sector

As part of the ECB’s Bank Lending Survey, German banks have for years repeatedly been reporting renewed pressure on margins in their corporate loans and private mortgage businesses. There is intense competition in both segments, causing the dissatisfactory trend for margins. The drivers behind the intensification of banking-sector competition are technical progress in the form of digitisation and extremely low interest rates. The growing competition is making itself felt above all in the fields of corporate banking and account management/payment transactions, less in deposits business. Because in banking there is very limited scope for product differentiation, competition tends to take place as regards the terms and conditions offered, which squeezes margins further. Service providers have the incentive to counter narrow margins by boosting business volume. Given the simultaneous restricted growth potential in the market as a whole, the battle for market share becomes all the fiercer as a consequence. While…

German banks: Rising risk aversion for property loans

As the current ECB Bank Lending Survey shows, a slender majority of banks in Germany intends in coming months to tighten their guidelines for approving property loans to private households. This is the first time since the European Mortgage Credit Directive was translated into law in Germany in spring 2016 that banks have declared such an intention. Back then the banks were responding with greater caution to the uncertainties resulting from implementing the directive. A key factor behind the current tightening of loan approval standards is the sharp rise in property prices in German conurbations. While there is no sign of a general property price bubble in Germany, in some regions there are increasingly excessive valuations for housing in various cities that give cause for concern. Furthermore, in some regions, mortgages have burgeoned. The current tightening to their loan approval guidelines some banks plan is an appropriate response to this…

Capital market yields on both sides of the Atlantic likely to tend moderately higher over the year

The European monetary watchdogs have meanwhile returned from their summer breaks and confirmed the direction of monetary policy. Starting in October, monthly bond purchases under the ECB’s asset purchasing programme (APP) are to be reduced to EUR 15bn, with net new purchases expected to be concluded by the end of the year. Even if this means that the European central bankers are taking another small step towards monetary normality, the monetary stimulus is still far-reaching. The ECB’s forward guidance shows that key interest rate hikes are not an issue for the time being. We only expect the ECB to allow the deposit rate to carefully head upwards over the year as a whole. We do not envisage the first „real“ interest rate hike being made before the end of next year at the very earliest. While the ECB monetary watchdogs are clearly finding it hard to seriously depart from their…

Central banks proceeding in a very orderly manner

Compared to the political sphere, developments at the most important central banks are proceeding in an orderly fashion. Nor is this likely to change in the next few months. The European monetary watchdogs recently reset the stage for the further course of monetary policy. Worthy of note in this context is the fact that under current conditions the key rate is to remain unchanged until through the summer of next year. This leaves the ECB’s monetary policy in autopilot mode. Only the “Target2” topic has been the object of controversial debate recently. However, this debate focusses on the wrong points. The liability risks should be placed less to the fore than the question of how confidence in the periphery states can be restored again. On the other side of the Atlantic the Fed’s monetary policy is also likely to continue to proceed in a very orderly manner. The US monetary…

Money market reform focused on safety rather than term premium

Time is pressing – that is the unanimous opinion of the working group for a risk-free reference interest rate in the Eurozone. The current overnight reference interest rate in the Eurozone, the Eonia (Euro OvernIight Index Average), may only be used for new contracts until the end of 2019 and after that for existing contracts, if need be. The ECB considers ESTER (Euro Short-TErm Rate) to be the hottest succession candidate, even if the decision on this has yet to be passed. However, ESTER is trading at an average nine basis points lower than the Eonia which could hamper the transition. While a spread on ESTER that, for example, declines over time would ease the reference interest rate transition, conceptual simplicity and the tight time frame argue for a clean cut. Unlike Eonia, Euribor (Euro InterBank Offered Rate) could continue as a benchmark beyond 2019, but this does not mean…

German banks tightening credit guidelines for corporate customers

As revealed in the current Bank Lending Survey evaluation for July, a small majority of the institutions surveyed would like to introduce stricter guidelines for granting loans to corporate customers in the months ahead. This will affect both small and medium-sized enterprises as well as large enterprises. By tightening their credit guidelines for the first time since April 2015, banks are responding to the current economic slowdown. The deceleration in economic growth to be feared for this year and next can be largely attributed to the international trade disputes as well as other geopolitical risks. The strongly exporting German SMEs and large-scale corporates would be particularly affected by a further escalation of protectionist measures. However, there is no reason at this juncture to fear a slump in loan granting to corporate customers: on the one hand, only a small majority of banks have so far planned to tighten their credit…

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