My dear impertinent, dear impertinent,
As you know, in this world of variable rates in which we evolve, there is a small village which still and always resists the banking legions.
Surrounded by entrenched camps of bankers, the small Gallic village resists and continues to operate on fixed-rate mortgages.
Fixed rates make it possible to avoid waves of insolvencies every time rates rise and, eventually, financial crises because banks inevitably find themselves weakened by the number of defaulting borrowers which increases in these cases.
This is exactly how US banks swung wildly during the subprime crisis of 2007-2010 and how Lehman Brothers collapsed in a huge crash that resonated around the world.
The ECB pushes for the adoption of floating rates in France
The ECB wants to generalize the use of floating rates to finance mortgages, reports Capital magazine.
“A policy that goes against the French banking tradition and which raises many reservations on the part of French finance professionals. France differs from most European countries in the preeminence of fixed interest rates when it comes to real estate purchases. A habit that can be dangerous for banks in the event of a rate hike, but the latter still maintain this particularity. However, in a difficult economic context, the European Central Bank (ECB) is pushing for the adoption of floating rates in France.
And sometimes you have to pinch yourself to believe what you hear is true.
“Variable tariffs offer the advantage of being more accessible to families with limited income. Therefore, the ECB would like to generalize their use in France to facilitate access to mortgages”.
To facilitate access to credit according to the ECB and allow loans to the poorest and most vulnerable, it is necessary to switch to variable rates. This reasoning is astounding because everyone knows and understands that the more fragile one is, the lower the income and the greater the risk of unemployment and the greater the sensitivity to rising interest rates of the household concerned. It is once again exactly the story of the Subprime crisis where African American families, statistically the most fragile, were hit hard by the wave of personal bankruptcies and above all before, before the rest of the population followed it more widely.
And for once I can only share the analysis of the French Banking Federation (FBF) which indicates that “these rates vary according to the economic situation and inflation. They can endanger people in the event of a spiraling increase and lead to a spate of loan defaults. It is not our French model, unique and protective”, judges an official of the FBF interviewed by Le Parisien.
The problem is that French banks have obtained the concession of a “transitional regime” until 2023, an exception that the ECB does not intend to extend.
But 2023 is tomorrow.
“We are trying to plead our case with Bercy, to warn the regulator, but we are fighting to be heard. If the noose becomes too tight, one day we will be forced to let go of our model,” warns a bank executive.
Technically in a fixed rate system like ours, French banks run the risk during rising rates where they lose some money and make more when rates fall. In any case, French banks have never been in difficulty because of the fixed-rate mortgages granted to their customers.
Technically, floating rates transfer interest rate risk… to borrowers, which is advantageous for banks, but which can prove dangerous to the stability of the financial system. While variable rate loans do indeed confer a number of benefits, they can endanger the creditworthiness of borrowers in the event of a rapid rise in interest rates, as they currently do. And when borrowers fail, banks fail too.
This is again exactly the story of the subprime crisis, a story from which the ideologues of the ECB seem not to have learned the lesson at all.
Worst of all, the ECB wants to force the French to switch to floating rates just as rates are rising.
A financial madness whose consequences we know in advance. The collapse of the banking system as the creditworthiness of borrowers collapses.
The ECB cannot say it does not know.
It’s already too late, but all is not lost.
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