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Rising interest rates: the European Central Bank sounds the alarm

Published August 19, 2022 - 3 mins reading time
Banks European Central Bank

Rising interest rates pose risks for banks. Faced with this situation, which is considered to be unprecedented in the last 10 years, the European Central Bank has decided to place 31 eurozone banks under "reinforced supervision".

ECB raises rates by 50 basis points

The sharp rise in inflation, which reached an all-time high of 8.6% in June 2022, has prompted the European Central Bank to rethink its approach.

Initially, the institution had announced a 25 basis point interest rate hike in June, but at the end of July, the ECB finally decided to raise rates by 50 basis points. Such an increase had not been seen since the creation of the euro.

The global rise in interest rates poses risks for banks, and the Central Bank wants to know whether they are sufficiently prepared. To this end, the institution carried out a first phase of tests, which ended in May. The preliminary results were reported by the daily Les Echos.

Rising interest rates: risks and opportunities for banks

According to the ECB, higher borrowing rates in some countries, as well as for corporates, are likely toresult in significant losses for banks, " particularly with regard to exposure to sovereign debt, or other financial institutions ", reports the daily.

The Italian political situation could have such consequences: the resignation of Prime Minister Mario Draghi has destabilized the markets, and led to a sharp rise in Italy's borrowing rates. The rate on the country's 10-year debt has risen by over 20 basis points, raising doubts among investors as to whether repayment can be made on schedule.

While the identities of the 31 eurozone banks placed under "enhanced supervision" by the ECB are not yet known, the Italian situation could have direct consequences for the Italian subsidiaries of French banks, as well as for the country's banks.

According to the European Central Bank, however, rising rates are not just a risk: banks could also benefit from them, boosting their profitability through higher margins.

The in-depth examination of the 31 banks under supervision is due to continue until the end of the year, and could lead the ECB to ask certain institutions to increase their capital.