That's why your major bank is breaking records in the middle of the interest rate crisis

Andreas Cervenka  

 

Highest profitability in 15 years - that's why the banks are making record profits in the crisis  

 

Published: Less than 1 hour ago 

 

Updated: Very recently 

 

This is a commenting text. Analysis and positions are the writer's. 

 

Mattias Erlandsson, Acting Head of the Department for Monetary Policy and Riksbank Governor Erik Thedéen. Photo: Anders Wiklund/TT 

 

MY ECONOMY

 

The only clear winners from the Riksbank's interest rate increase are the big Swedish banks, which have not been this profitable in fifteen years.  

 

The profit streak is a symptom that something is sick in the Swedish financial market.  

 

The Riksbank raises its interest rate by 0.5 percentage points and flags for another increase in June or September.  

 

Relatively few cava corks around the country are probably popped due to this news. 

 

The exception is possibly in the banking palace around Kungsträdgården in Stockholm. 

 

Pure frame winning lottery 

 

On Wednesday morning, reports came from SEB  and Handelsbanken which confirm that the environment with inflation and rapidly rising interest rates has become pure profit for the banks.  

 

It is above all the net interest, i.e. the difference between what the banks demand in interest and what they themselves pay to borrow, that increases. 

  

SEB's net interest income by a whopping 60 percent to 11.3 billion in the first quarter Photo: TT  

 

For SEB, net interest income rose by as much as 60 percent to 11.3 billion in the first quarter and for Handelsbanken by 45 percent to 11.5 billion.  

 

SEB's operating profit increased by 48 percent to 11.6 billion and for Handelsbanken by 57 percent to 8.5 billion.  

 

The fact that the Swedes are highly indebted is usually pointed out as a major risk for the public economy. But the figures above show that the loans are a profit machine for the banks, especially when interest rates rise.  

 

Want to sell more loans 

 

Unfortunately, the banks therefore have very strong incentives to drive development, to sell more loans, which is bad for society as a whole.  

 

The banks' profitability, measured as return on owners' capital, is now the highest for SEB and Handelsbanken in a very long time. You have to go back to the record years before the financial crisis in 2008 to find corresponding figures.  

 

Calculated in kronor, the profits are significantly higher now, in 2007 SEB made an operating profit of 17 billion, last year the profit was 35 billion.  

 

An important explanation for the profits is that the banks have not raised the interest rate on their accounts at the same rate as on the loans. Admittedly, the interest rates on the bank's pure savings accounts have been raised, with both SEB and Handelsbanken you can now get just under 3.5 percent interest if you lock up the money for two years.  

 

Similar record figures for the banks have not occurred since before the financial crisis in 2008. Photo: Alexander Larsson Vierth/TT  

 

But according to Statistics Norway, 83 percent of the 2,700 billion Swedes' bank savings are in so-called checking accounts, i.e. ordinary salary accounts. And there the interest rate is still zero.  

 

That the banks make big money when they can borrow huge sums at zero percent interest and lend at 4-5 percent should not come as a surprise.  

 

Lending money to the Swedish government today yields 3 percent if you choose a so-called government debt bill that runs for one month (a type of security). Lending to a bank thus gives zero percent on regular accounts. 

 

Guaranteed by the state  

 

That's pretty crazy. The risk in lending to the Swedish state is largely non-existent. Swedish banks are indeed considered stable, but all banks are inherently more risky than other companies. 

 

That is why the state directly and indirectly guarantees the banks' operations. If they get into trouble, both the Riksbank and the taxpayers will step in (look at what happened in Switzerland with Credit Suisse).  

 

How is it then that we accept to give away money to the banks via zero interest accounts? 

 

Competition doesn't work 

 

Because it's flexible. 

 

It is true that there are now a wide range of alternatives on the banking market, but only the big banks control the entire chain of the infrastructure required to live a modern life, from Swish to Bank-id to mortgages, pensions and ISK accounts.  

 

Only ten banks offer Bank-id and there the big banks are completely dominant. Without a Bank ID, it is difficult to function fully as a citizen because it is the most important gateway to a wide range of social services.  

 

The fact that the banks can make record profits in the middle of an economic crisis shows that competition does not work. The government recently allocated ten million kroner extra to the Swedish Competition Authority for them to take a closer look at the food giants. Maybe the inspectors can stop by some bank branches too?