Opinion of the European Central Bank of 28 June 2023 on tying the minimum base interest rate on regulated savings accounts to the deposit facility rate and introducing a protected interest rate on savings deposits (CON/2023/18)

OPINION OF THE EUROPEAN CENTRAL BANK of 28 June 2023 on tying the minimum base interest rate on regulated savings accounts to the deposit facility rate and introducing a protected interest rate on savings deposits (CON/2023/18) Introduction and legal basis

On 31 May, 13 June and 14 June 2023, the European Central Bank (ECB) received three requests from the Governor of the Nationale Bank van België/Banque Nationale de Belgique (NBB), acting at the request of the Belgian Minister for Finance, for an opinion on three draft laws, respectively: (1) a draft law on tying the minimum base interest rate on regulated savings accounts to the ECB deposit facility rate (hereinafter the ‘first draft law’); (2) a draft law on tying the base rate on savings deposits to the ECB deposit facility rate (hereinafter the ‘second draft law’); and (3) a draft law introducing a protected interest rate on savings deposits (hereinafter the ‘third draft law’, together with the first and second draft laws collectively referred to as ‘the draft laws’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third and the sixth indents of Article 2(1) of Council Decision 98/415/EC , as the draft laws relate to (1) the basic task of the European System of Central Banks (ESCB) to implement the monetary policy of the Union pursuant to Article 127(2), first indent, of the Treaty, (2) the NBB, (3) rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets and (4) the ECB’s tasks concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft laws

1.1 The key objective of the first draft law and of the second draft law is to introduce a new minimum base interest rate on regulated savings accounts held with credit institutions by households, which may not be lower than the ECB's deposit facility rate less two percentage points. The purpose of the third draft law is to introduce a protected base interest rate on the first EUR 10 000 of regulated savings deposits per depositor that is linked to the interest rate on Belgian 10-year sovereign bonds. These new minimum and protected interest rates will coexist with the current interest rate floor of 0.11 % (consisting of a base interest rate of 0.01 % and a fidelity premium rate of 0.10 %).

1.2 According to the explanatory memoranda to the first draft law and to the second draft law: (1) the proposal to tie the minimum base interest rate on regulated savings accounts to the ECB's deposit facility rate is based, among others, on the consideration that although the deposit rate at which credit institutions are able to deposit money with the ECB in the short term increased to 3.25 % in May 2023, the average return on regulated savings accounts in Belgium during the same period remained lower than 1 %; (2) this low level of interest rate is due to the market power of Belgian credit institutions and a lack of competition on the Belgian banking market; and (3) tying the minimum base interest rate on regulated savings accounts to the ECB deposit facility rate would ensure a fair return on regulated savings accounts and a better transmission of monetary policy without risks to financial stability. 1.3 According to the explanatory memorandum to the third draft law, the proposal to introduce a protected base interest rate on the first EUR 10 000 of regulated savings deposits per depositor that is linked to the interest rate on Belgian 10-year sovereign bonds is based on the following considerations: (1) an inflation rate that is systematically higher than the remuneration of savings deposits results in a loss of value for money held on regulated savings accounts; (2) in a context of high inflation, it is particularly important to protect savings deposits held by households by guaranteeing reasonable but attractive interest rates; and (3) the devaluation of regulated savings deposits contrasts with the significant excess profits realised by the Belgian banking sector due to the rise in the ECB's interest rates. 1.4 The draft laws amend existing provisions of the Belgian Royal Decree of 27 August 1993 2 3 implementing the Belgian Federal Income Tax Code 1992 (the ‘RD/ITC’) . In particular, the RD/ITC sets out the conditions that savings deposits held with credit institutions by households on regulated savings accounts must comply with in order to benefit from the tax exemption set out in the Belgian Federal Income Tax Code . The first EUR 625 of income per year, the amount of which is indexed, arising from savings deposits is not considered part of capital and movable property income, and is hence exempted from related taxes. The relevant provisions of the RD/ITC that are amended by the draft laws specifically concern the remuneration of savings deposits held on regulated savings accounts. 1.5 The first draft law amends the relevant provisions of the RD/ITC by adding two new paragraphs providing that: (1) the base interest rate applied by an institution to the savings deposits it receives may not be lower than the ECB’s deposit facility rate applicable on the tenth day of the month preceding the current calendar half year, reduced by two percentage points; and (2) the Minister for Finance may, with the agreement of the Ministers responsible for the Economy and Consumers, grant a temporary derogation from this minimum base interest rate (for a specific institution or the sector as a whole) upon the recommendation of the NBB where the latter considers that the application of this new minimum base interest rate would lead to serious risks for financial stability. The first draft law enters into force on 1 July 2023.

1.6 The second draft law also amends the relevant provisions of the RD/ITC by providing that: (1) the base interest rate applied by an institution to the savings deposits it receives cannot exceed three %; (2) the base interest rate applied by an institution to the savings deposits it receives may not be lower than the ECB’s deposit facility rate reduced by two percentage points; and (3) any increase or decrease in the ECB’s deposit facility rate is applied as from the first calendar day of the second month following the announcement by the ECB of a change to the deposit facility rate. The first adjustment of the base interest rate in accordance with the second draft law is applied as from the first calendar day of the second month following the publication of the law. 1.7 The third draft law also amends the relevant provisions of the RD/ITC by providing that: (1) in addition to the existing base interest rate and the fidelity premium, the remuneration of regulated savings deposits must also consist of a protected interest rate equivalent to the average interest rate of the Belgian 10-year sovereign bonds for the preceding calendar quarter; (2) the protected interest rate applies to the first EUR 10 000 of savings deposits per depositor and the existing base interest rate applies to that part of the savings deposit that exceeds EUR 10 000; and (3) the various rules applicable to the base interest rate also apply to the protected interest rate.

2. Observations

2.1 Effects on the transmission of monetary policy The ECB reiterates that it is generally not in favour of regulating savings remuneration, as this presents challenges for the efficient transmission of monetary policy. Deposits are a key source of funding for the banking sector, facilitating the smooth provision of credit to households and companies. Administrative control of deposit rates could interfere with the credit intermediation capacity of credit institutions, thereby presenting obstacles for the smooth transmission of monetary policy. Such concerns apply to forced increases in deposit rates, but also to the imposition of a nominal cap on the base interest rate paid to depositors, the level of which may prove inappropriate in future scenarios where the cap becomes binding. Moreover, the financial stability concerns highlighted in paragraph 2.2 can have further unwarranted impacts on the supply of credit. 2.2 Effects on financial stability The ECB observes that the implementation of the draft laws could result in a negative impact on the profitability of, the interest-rate risk management by, and the provision of credit by Belgian credit institutions, and ultimately is likely to have implications for financial stability. It is important to note that, among other factors, interference with the pricing of deposits was a contributing factor to the US savings and loan crisis in the 1980s. Savings deposits constitute an important source of funding for a significant number of Belgian credit institutions, which use them to fund mortgage loans, the bulk of which are granted at fixed interest rates. A sudden increase in the level of remuneration of savings deposits as proposed in the draft laws would impact financial stability on at least two fronts. First, the draft laws propose a substantial increase in the level of the remuneration of savings deposits with immediate effect. Such abrupt and material repricing of the outstanding stock of savings deposits (around EUR 300 billion, or one quarter of the Belgian banking sector’s balance

sheet) will suddenly increase credit institutions’ funding costs, while on the other side of their balance sheets their assets continue to reprice more gradually, notably due to the high share of fixed-rate mortgage loans in Belgium. Therefore, the proposed increase is likely to have a negative impact on the profitability of the banking sector or, in the case of the most vulnerable credit institutions, lead to outright losses. Credit institutions would have to absorb this negative impact and/or offset it, at least in part, by passing the higher funding costs on to customers – for example in the form of higher lending rates. The latter may lead to a further slowdown in credit institutions’ lending growth, or to a shift to lending by entities (for example non-banks and foreign banks) that are not affected by the draft laws. Second, the ECB considers that the implementation of the draft laws could undermine the effectiveness of the strategies adopted by credit institutions in the past years to hedge interest-rate risk in the banking book. While Belgian credit institutions have taken active steps to hedge their interest-rate risk to a significant extent, a gradual repricing of liabilities (including savings deposits) also plays a key role in the effective management of interest-rate risk in the banking book, by allowing credit institutions to match the interest-rate sensitivity of assets and liabilities. An unexpected shock to the level of remuneration of savings deposits resulting from the draft laws would generate interest-rate mismatches that the past interest-rate risk hedging strategies did not account for. This would particularly affect the interest-rate risk management of those credit institutions with a higher dependence on savings deposits and a higher share of fixed-rate mortgage loans on their balance sheets. The ECB acknowledges that the first draft law provides for the possibility of a derogation, which can be invoked in the case of risks to financial stability. If the first draft law is adopted and implemented as proposed, any recommendation that the NBB may make as to the existence of serious risks to the financial stability should be duly taken into consideration. 2.3 Effects on the banking sector Within the context of the direct supervision of significant euro area credit institutions, the ECB closely monitors the solvency, liquidity, and profitability of credit institutions. Credit institutions should not be prevented from generating sustainable profits, as this results in well-capitalised credit institutions that operate competitively and can continuously lend to customers on affordable terms as well as withstand potential macroeconomic shocks. The profitability (or lack thereof) of credit institutions depends on a variety of elements, one of which is the net interest rate margin. Using legislation to set the deposit interest rate – which is one element of the net interest margin – raises the prospect of unintended consequences, especially where macroeconomic conditions change. The alleged excess profitability in the Belgian banking sector is one of the drivers of the draft laws. However, while profitability levels differ between credit institutions, the average return on equity of 9.9 % in 2022 does not in the ECB’s view demonstrate excess and should be considered in the context of the current cost of equity, to which it is not disproportionate. Moreover, the interest rate margin – which had been under pressure during the period of very low interest rates – has now returned to levels similar to those seen prior to this period.

The draft laws would result in a sudden and sharp increase in the cost of funding. This would challenge bank profitability, as the repricing of the mortgage portfolio occurs only gradually, i.e. at the pace of repayment of the existing stock of loans. The draft laws’ uniform treatment of all credit institutions raises concerns, as the effects of the draft laws are likely to be highly unevenly distributed across Belgian credit institutions depending on their size and business model. In particular, smaller credit institutions and credit institutions more reliant on savings deposits in their funding structure and/or that have a higher share of long-term fixed-rate assets (such as mortgages) on the asset side of their balance sheet, would be more severely affected. The draft laws refer to the level of remuneration offered to credit institutions on their reserves held with the Eurosystem, and therefore target the difference between the interest rate that credit institutions receive from their deposits with the ECB and the interest rate that they pay to depositors. However, the smaller credit institutions and/or those that hold significant volumes of deposits, i.e. the credit institutions likely to be most affected by the draft laws, in practice make only very limited use of the ECB deposit facility. In fact, 45 % of the funds deposited with the ECB by Belgian credit institutions originate from Belgian credit institutions that do not offer savings accounts. Hence, the ECB deposit rate is unlikely to be an accurate indicator of the evolution of the interest earned on the asset side of the balance sheet of such credit institutions. Moreover, it should be kept in mind that in future the amount of reserves held by credit institutions with the Eurosystem may become lower due to a variety of factors. Finally, in accordance with applicable Union law, credit institutions themselves are primarily responsible for the sound management of the risks on their balance sheet, including for hedging their interest-rate risk. The ECB is concerned that the draft laws would interfere in the strategic and risk management of credit institutions.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 28 June 2023.

[signed]

The President of the ECB

Christine LAGARDE