Concerns about inflation: Volksbanks are in favor of a clear interest rate signal from the ECB

The Volks- und Raiffeisenbanken could have reported on a very successful 2021 financial year.

After all, they were able to increase their consolidated profit before taxes by a significant 46 percent to 10.5 billion euros.

But for Marija Kolak, President of the Federal Association of Volks- und Raiffeisenbanken (BVR), record high inflation was the focus of the press conference on Wednesday in Frankfurt.

In the short term, the price pressure will not be dampened.

It is by no means certain that inflation peaked at 7.6 percent in June.

Markus Fruehauf

Editor in Business.

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Here Kolak referred to the persistent drivers of inflation: high energy prices, supply chain problems and a shortage of skilled workers.

Not to forget the weak euro, which hovered around 1.0000 dollars on Tuesday and can provide an additional boost to inflation due to expensive imports.

The European Central Bank (ECB) is now required for the BVR President.

The first rate hike announced for the Council meeting on July 21 is long overdue.

So far, however, ECB President Christine Lagarde has only promised a rate hike of 0.25 percentage points or 25 basis points.

For Kolak, that's not enough: "With a large rate hike of 50 basis points, i.e. an increase in the main refinancing rate to 0.50 percent and the deposit rate to 0 percent, the ECB should send a clear message to the markets that it is taking decisive action to counteract inflation .” At the same time, in her view, monetary policy should retain the necessary freedom of action because uncertainty in the economy remains extremely high.

Inflation would get a new boost if the delivery restrictions on gas imports were to come to a head again.

Then Kolak does not rule out a severe recession either.

Nevertheless, in their opinion, the interest rate hikes planned by the ECB are necessary.

At best, the central bank can adjust the pace and extent.

Rising interest rates cause valuation losses

With an equity base of 129.5 billion euros, which was a good 6 percent stronger last year, the cooperative institutes – 770 Volks- und Raiffeisenbanken, Sparda-Banken, PSD Banken, special institutes, the DZ-Bank Group and the Münchener Hypothekenbank – have opted for prepared for future challenges.

BVR board member Andreas Martin expects a significant drop in earnings this year.

The outlook is clouded by the abrupt rise in interest rates and the weakened economy.

The BVR also assumes that there will be higher risk provisions, the reversal of which contributed to the increase in profits in the past year.

In principle, Kolak sees the partial normalization of interest rates as good news for banks' earnings.

But the rapid turnaround in market interest rates poses a major challenge. Because the rise in yields – on the ten-year federal bond from minus 0.4 percent in mid-December to more than 1.9 percent in mid-June – is associated with price losses.

Kolak spoke here of "market value-related valuation effects in the banks' own investments".

In addition, the increasing economic risks are very likely associated with higher credit risks, even if there are currently no signs of a significant increase in insolvencies.

Deposit insurance through the back door

Despite the rise in interest rates, the BVR President has not yet seen any downward movement in the mortgage lending business.

The securities business has been very lively in recent years.

Significant increases in savings plans and funds were recorded.

"We will do everything we can to advise and enlighten customers," promised Kolak, referring to the currently difficult stock market environment.

According to her, saving securities is also possible with small amounts.

BVR board member Daniel Quinten warned against the introduction of a European deposit insurance through the back door.

It is true that the Eurogroup decided at its meeting in June not to pursue uniform deposit insurance any further.

However, Quinten fears that the intended strengthening of the common framework for crisis management will result in a Europe-wide synchronization of the instruments in the deposit guarantee directive and the resolution directive.

Quinten also recognizes efforts to significantly expand the EU resolution authority SRB's access to national deposit guarantee schemes.

He regards applying the resolution regime indiscriminately to medium-sized and small banks as an attack on the German three-pillar system.