European banks: impact of higher interest rates on net worth and revenues
According to the European Central Bank (ECB) in its latest Financial Stability Review of May, when assessing the interest rate risk exposures and hedging of euro area banks’ banking books, a normalisation of monetary policy, that currently means an interest rate raise scenario, should not be a major concern in terms of aggregate impact on the net worth of the euro area banking system. This happens even bearing in mind that more than half of the banks analysed would have a moderate negative impact, meaning that in the event of higher interest rates, their assets will lose more value than their liabilities, thus reducing economic value of equity.
Main conclusions of the analysis:
- a steepening of the yield curve by 200 basis points at the longer end in the third quarter of 2021 would have reduced banks’ aggregate net worth by around 4% of Common Equity Tier 1 capital. A 25% of the banks would have suffer higher negative impacts.