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:
- Higher interest rates at the eurozone are expected to be positive in banks’ net interest income in the short term, but they may also weigh on banks’ net worth in the medium term: On aggregate, euro area banks have a positive duration gap, which implies that if interest rates rise, assets will lose more value than liabilities, thus reducing banks’ economic value of equity.
- Interest rate risk exposure (IRR) of euro area banks: the aggregate impact of higher interest rates on bank net worth would be moderately negative, but wide variations exist at the level of individual banks. The analysis of the ECB shows that:
- 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.
- Banks’ IRR exposure appears moderate on aggregate, and it has declined since 2017. Banks tend to counterbalance this risk increasing their interest rate hedging derivative activity. According to the analysis Euro area banks have held an increased volume of interest rate swaps over the last two years.
Filter results
Economist José Carlos Díez notes that Spain’s banking sector has an excess of deposits and sufficient liquidity to meet the credit demand of companies and households, and does so at the lowest interest rates in Europe, according to the ECB.
According to CEPS, regulatory and supervisory complexity acts as a structural constraint on integration, investment and market depth, with costs that weigh most heavily on smaller institutions, new entrants and cross-border business models.
According to the ECB, an efficient, secure and integrated payment system would strengthen the international role of the euro and deliver benefits such as lower financing costs, reduced exposure to exchange rate fluctuations and greater protection against sanctions.
According to the IEA one key debate in the EU on financial regulation simplification is whether to explicitly include competitiveness, efficiency or contribution to growth as objectives of the regulatory agencies, following the UK example.
According to IE University’s Center for the Governance of Change, deeper and more integrated financial markets would strengthen the euro’s global role. This requires, among other elements, resilient and interoperable payment systems and completing the banking union.
Partnerships between banks and private credit: The winners will be those that combine bank underwriting discipline, distribution, and customer access with private capital’s appetite for long-dated, illiquid risk, according to Oliver Wyman.
Lucrezia Reichlin (CEPR): A CBDC is not a prerequisite for monetary sovereignty. Confusing money with payments can risk misdiagnosing the problem and misaligning economic policy efforts.
According to the World Economic Forum´s Global Risk Report 2026, geoeconomic confrontation, mis- and disinformation and societal polarization make up the top three short-term risks, while environmental risks dominate in the long term.
According to the World Economic Forum, over the last few years AI has moved from experimentation to workflow integration, promising systemic gains in productivity while also raising critical questions around economic inclusion, values, trust and resilience.
According to AFME, a clearer, more coherent, and proportionate regulatory environment, without unnecessary layers and focuses on growth and competitiveness, is keyl to increase investor confidence, unlock private capital and deepen European capital markets
According to the Center for the Governance of Change at IE University, Europeans support technological progress if it reinforces security, inclusion, and social welfare; but resist it when change feels imposed, opaque, or misaligned with their values.
According to a recent report released by CEPS, European financial regulators should adopt competitiveness as a formal secondary objective, following the precedent established by the UK's Financial Services and Markets Act 2023.