Net Interest Income of Greek Banks: is it a case of Bankflation?

Abstract

On 27th of July 2022, the European Central Bank (ECB) responding to emerging inflation pressures increased the interest rate of the main refinancing operation to 0.5% up from 0.0% which was the norm for the second half of the previous decade. Since then, the ECB responded to inflationary shocks by increasing interest rates nine more times till 20 September 2023, reaching 4.5%. Following these unprecedented hikes in ECB interest rates, Greek banks responded swiftly by raising their lending interest rates, whereas they kept deposit rates at very low levels with the net interest margin (NIM) being at 2.6% in the first half of 2023 compared to 1.5% in the Euro-area while in November 2023, the Greek NIM was raised further to 4.83%, which was more than twice the corresponding NIM at 2.4% of Euro Area banks. Our dynamic panel VAR analysis study examines whether the oligopolistic structure of the Greek banking industry contributes to this divergence in NIM. This high NIM has induced a staggering increase in net interest income of Greek banks by 59.9% in 2023 compared to 2022 from 2.54 mil euros to 4.07 mil euros. During the same period, Greece reported a negative saving rate at − 4%, as people resorted to their savings to cope with greedflation in consumer goods. We show that successive interest rate hikes by the ECB aimed to reduce inflation have positively contributed to the sustainability of the Greek banking industry by building up stronger capital buffers and accelerating amortization of the deferred tax credits mainly through the channel of NIM. Alas, the high cost of diverging Greek NIM from the rest of the Euro Area hurts credit expansion and fuels existing greedflation by generating its own bankflation. Our study shows that EU policymakers should accelerate the banking union in the Euro Area which would enhance competitive pressures for Greek banks and potentially reduce NIM and tackle bankflation. The regaining of Greece’s investment grade gives the impetus to the convergence of Greek NIM to euro area ones.