ECB policy tightening could raise delinquency levels: de Guindos

The vice president of ECBLuis de Guindos, told an Italian newspaper that the interest rate hikes by the European Central Bank are in their final stretch, while warning that the increase in the costs of loans could affect the quality of the bank assetsalthough the indicators remain positive.

The ECB has raised rates by a total of 375 basis points since last July and has promised further hikes, but at a more moderate pace of 25 basis point increases, following larger measures taken in the first part of its campaign to tighten its monetary policy.

“We have entered the final stretch of the path of tightening of our monetary policy”De Guindos declared on Sunday, according to Il Sole 24 Ore. “And that is why we are returning to normality, at steps of 25 basis points.”

These rate hikes improve banks’ credit spreads, but they could also make it harder for some borrowers to repay debts, raising the ratio of non-performing loans.

“For the moment, the improvement in margins more than compensates for the possible losses derived from the increase in delinquency”Guindos said.

“The combination of a slowing economy and rising interest rates will bring about an increase in the cost of financing for banks and possibly an increase in non-performing loans.”

ECB head of supervision Andrea Enria previously told the Croatian newspaper Vecernji list that the ECB is watching “some first indications that loans are being paid late, an indicator that non-performing loans may be on the rise.

“We don’t expect a wave of delinquencies, but this is no time for complacency,” De Guindos added.

The official also warned about the call “shadow banking” -a category that includes non-bank financial companies such as funds or insurers- that is experiencing “some tension” given that it is highly leveraged and more exposed to liquidity risk.

Offering the ECB’s first estimate of the effects of quantitative tightening, or the reduction of the bank’s massive holdings of government debt,

De Guindos said this had raised 10-year government bond yields by 60 to 70 basis points, while rate hikes had had a much larger effect.

Source: Reuters