Redistribution by monetary policy

5 min
  • Net interest income of different economic sectors fluctuates wildly since the start of monetary loosening
  • Corporates and households in the South are among the big winners
  • French and Finish economies find themselves on the losing side

Monetary policy has distributional effects. Extreme monetary policy has extreme distributional effects.

That’s the lesson learned during the last nine years in the eurozone when the ECB constantly eased its policy, up to the point of the introduction of negative interest rates and asset purchase programs, worth several trillions of euros.

The fluctuations of net interest incomes of economic sectors in different euro countries bear impressive witness to that.

Although the concept of net interest income is easy to understand – the balance of interest income and expenses –, there are many ways to calculate it. The ECB, for example, uses interest payments after FISIM (see box) and only looks at the pure price/interest effect i.e. leaving changes in stock out of the equation.

Things are further complicated if so-called “opportunity costs or gains” are calculated by comparing the real development with a hypothetical “normal” trend development.

Such a contra-factual approach might be better suited than a simple comparison with the past to identify “winners” and “losers” of low interest rates. The problem is that nobody can say with certainty how things would have played out under “normal” circumstances.

We, therefore, use a different approach: We look at the real development, i.e. we use interest rate before FISIM (see box) and take volume changes into account. That’s because the sometimes huge changes in volume – reduction of debt, disposal of bonds or increase in bank deposits – should be seen as deliberate reactions to falling interest rates.

Furthermore, we compare the fluctuations with the base year of 2008, the start of monetary easing. Having said this, our calculation is nothing more – but also nothing less – than a straight illustration of what really happened in recent years.1

And in some cases, these changes in net interest incomes are nothing less than dramatic. Even more so if annual changes against the base year 2008 are cumulated: that way, the changes of the net interest income, as percentage of GDP, often reach double digit numbers.

1 Italy already showcased a notable reduction in banking sector risk where NPL stocks have been reduced by EUR104bn since 2014.

What is FISIM?

The national accounts refer to two forms of interest income and expense: before and after "FISIM", which stands for "Financial Intermediation Services, Indirectly Measured". This is calculated by adding/deducting the indirect fees charged by banks as part of their lending and deposit business, calculated using models, to/from the interest payments actually made.

In other words: the national accounts assume that interest payments consist of two components: the "pure" interest and the price for the banking service (e.g. loan processing, deposit management, etc.). This is why, for example, the interest income of private households is much higher with FISIM – after all, this income also settles any service fees relating to account management which the banks, however, conveniently withhold right away (which is why they are referred to as indirect fees). Interest expenses, on the other hand, are much lower, because part of the interest payments “actually” refers to the service fees for loan processing (which, however, are not directly reported by the banks).

The differences between the interest measurement before and after FISIM are by no means trivial, as a look for example at the German national accounts for 2016 reveals: according to these statistics, private households were faced with interest expenses of EUR 59.5 billion and earned interest income of EUR 15.9 billion in that year. By contrast, the figures after taking indirect bank fees into account are as follows: interest expense of EUR 26 billion and interest income of EUR 37.6 billion. This means that FISIM turns net interest income that is well in the red (EUR -43.6 billion) into a sizeable surplus (EUR +11.7 billion). This shows that the method used to calculate interest has a considerable impact on the result of the calculations.

In general, we do not believe that it makes much sense to look at interest income and expenses after the allocation of financial intermediation services indirectly measured for the purposes of our analysis – namely to assess the impact that the low interest rates have had on household finances. After all, while this sort of break-down might be consistent with the logic behind the national accounts, in the sense that it facilitates an estimate of the contribution to added value made by the banking sector, it does not reflect the reality of life for savers. After all, savers do not live in a theoretical world; they are not interested in what could have been credited to their account at the end of the year if the indirect banking services had been taken into account – rather, they are only interested in the funds that actually end up in their account. The same applies to their interest expenses, which no saver is likely to break down into pure interest payments and fees in his head (after all, what formula would he use?); what is relevant is the amount that has to be paid to the bank every month.

Net interest income of households: Monetary fault lines

For households, the income gains or losses resulting from the change in net interest income in the years of the low interest rates are very high in a number of EMU countries (see figure 1). Spain and Portugal, for example, are ranked among the "winners" of the low interest rate policy.

As far as Spain is concerned, the changes in volume are also likely to have contributed to the substantial interest rate gains: the marked increase in deposits put a damper on the drop in interest income, while the reduction in loans accelerated the drop in interest expenses. Developments in Portugal followed a similar trajectory to those in its neighboring country: rising assets and declining liabilities turned a negative net interest result at the start of the low interest rate period into a positive one.

On the other hand, for some households, notably in the Netherlands and France, the low interest rates were something of a non-event; net interest income remained virtually unchanged because interest income and expense fell more or less in tandem with each other. This is due to a more or less parallel development in volumes (rising in each case) and interest (falling in each case).

The biggest "interest rate losers" are Italy and Belgium. As far as Italian households are concerned, this is due largely to the dramatic slump in interest income, a trend that was fueled not least by the drastic reduction in the bond portfolio, which was slashed from around EUR 800 billion (end of 2008) to EUR 360 billion (2016). As a result – despite an increase in bank deposits – interest-bearing assets have fallen by a good 10%. In Belgium's case, it is primarily the (slight) increase in interest expenses that is responsible for the drop in the net interest result. This development, which bucked the trend, is due to rising debt levels and what has been only a very slow drop in interest rates in this area.

In addition to households in these two countries, German and Austrian households also have to be counted among the losers, with cumulative interest losses corresponding to roughly three percent of GDP.

One reason is the widening interest differential between the asset and liabilities side: whereas deposit interest rates are adjusted to reflect the key monetary policy rate fairly quickly, it takes some time for lending rates to adjust, not least due to the long fixed-interest periods that are common practice for mortgage loans in Germany.

The upshot: Although German savers have stepped up their bank deposits by just under 40% since 2008, interest income plunged by more than 70%. Interest income plays a decisive role in Austria, too, plummeting by almost 80% during the period under review, despite the fact that assets have grown by 20%.

To sum up: the main winners of the low interest rates have been the households in the southern euro crisis countries, such as Portugal and Spain, whereas "countries of savers" like Germany, Austria and Belgium have lost out.

Figure 1 Cumulated changes in net interest income of households between 2008 and 2016 (% of GDP)*


Sources: Eurostat, Allianz SE

Figure 2: Cumulated changes in net interest income of non-financial corporations between 2008 and 2016 (% of GDP)*


Sources: Eurostat, Allianz SE

Net interest income of non-financial corporations: Benefiting nicely

In general, non-financial corporations benefited nicely because their liabilities are much bigger than their assets. But not all companies are equal: Spanish companies, for example, profited the most because not only rates fell but debt was also reduced (by 18% between 2008 and 2016). In contrast, French companies increased their debt load by one third and consequently saw a much smaller rise in their net interest income (see figure 2).

Net interest income of financial corporations: Margin squeezing

Most eurozone banks suffered from low interest rates as their interest margins were squeezed. In the case of Spanish banks, shrunk balance sheets came on top. On the other hand, Belgian and Dutch banks – somehow surprisingly – bucked the trend: They managed to widen their margins. But this might be mainly due to the choice of the base year, 2008: Both the Dutch and Belgian banking systems were early victims of the escalating banking crisis and many banks were forced at that time to offer rather high deposits rates to attract funds.

Figure 3-Cumulated changes in net interest income of financial corporations between 2008 and 2016 (% of GDP)*


Sources: Eurostat, Allianz SE

Figure 4 Cumulated changes in net interest income of governments between 2008 and 2016 (% of GDP)*


Sources: Eurostat, Allianz SE

Net interest income of governments: Debts without regret

All Governments benefited hugely form falling interest rates. However, even under these circumstances governments in Spain and Portugal had to pay more interest – because public debt soared since 2008: by more than 200% in the case of Spain and more than 100% in the case of Portugal. Finland, too, saw a doubling of its debt pile during that period. On the other end of the spectrum are Italy and Germany where debt increased only “moderately” by around 40%. Consequently, both countries could improve their net interest income as the (implicit) rates for government debt dropped by around 2 percentage points, lowering the interest bill by 36% respectively 15%. In the case of Germany, this drop is the main driver behind its recent achievement to balance the public budget.

Net interest income: French blues

In the eurozone as a whole, these changes in net interest income of different sectors more or less cancel each other out. However, because of extensive economic integration, this is not the case for each and every economy in the monetary union.

“Big winners” are the economies of Spain, the Netherlands and Portugal. For both the Southern economies the pattern is very similar: Lower net interest incomes of banks and the government are more than offset by improvements on the side of companies and households. In the Netherlands, the story is slightly different:

Net interest incomes of the government and households barely changed but financial as well as non-financial corporations improved.On the other hand, the economies of France and Finland had to cope with a negative development.In both cases, the lower net interest income of banks is mainly to blame for the overall dismal performance.For the other countries in focus, the overall impact was rather marginal as “losses” of some sectors are compensated by “gains” of other sectors. Germany, too, belongs to this group:

Altogether, the German economy comes off rather well. However, the distribution of “winners” and “losers” is quite different to the Southern economies.In Germany, the biggest profiteer of extremely low interest rates is – besides non-financial corporations – the government; on the other hand, not only banks but also households find themselves on the losing side.

Figure 5 Cumulated changes in net interest income between 2008 and 2016 (% of GDP)*


Sources: Eurostat, Allianz SE