Let banks put the brakes on rate increases

No sooner had European Central Bank (ECB) Governor Jean-Claude Trichet announced a 0.25 percent hike in the basic rate to 3 percent last week, which had been expected for some time, than our own commercial banks began pelting us with increases in lending rates – from mortgages to consumer loans. Why such haste? It was only a few days ago that the country’s five biggest banks, National, Alpha, Eurobank, Piraeus and Emporiki, reported record profits for the first half of the year – a total of 1.5 billion euros. Such profit growth (in the order of 65-70 percent) beats that of petroleum companies. Advice, therefore, to the bankers for restraint and reasonable rate increases, not just in lending but also in deposit rates, seems well called for. After all, avarice is a deadly sin. Of course, every rate hike by the ECB is passed on to commercial banks throughout the eurozone. However, in each member country the banking system, according to the cost of raising capital (that is, ultimately, the deposit rates paid) and operating costs, decides the lending rates, always taking care not to bring economic activity to its knees. Our own banking system wields an advantage in this respect compared to many other European countries, but also has a handicap. The advantage is that Greek banks have a large volume of deposits under management because Greeks, despite big changes in consumption habits in recent years, continue to be keen savers. Perhaps not as avid as in the past but the strong propensity to save is still there. For instance, private and corporate deposits in Greek banks (call, savings or term deposits) stood at about 160 billion euros at the end of May, when, at the same time, total lending was around 145.4 billion euros. That is, deposits outpaced credit. It is very important to note that the cost of these deposits to the banks is extremely low, ranging from 1 percent for savings to 2.40 percent for term deposits. In contrast, should Greek banks borrow from the ECB, they would have to pay interest of 3 percent, though for the time being, at least, they do not need to, having such abundant savings at their disposal at such low cost. There could be no better reason for them not to hasten to raise their lending rates, and when they do, to show restraint. Greek banks, on the other hand, are handicapped by operating costs higher than the average in the rest of Europe, due to the fact that competition is still rather weak and they are slow in modernizing. At any rate, because total household debt is running very high, Greek banks ought to put a brake on their profit growth so that the economy can adapt to the high rates smoothly, without a surge in defaults that will ultimately shake the banks themselves.

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