Why are banks demanding extra margins on their loans?

Banks are demanding higher margins and are making these demands against some “clients” in the courts. For the purposes of simplification for this short commentary, I took the 2011 figures of the Nordea Group as a typical strong Nordic commercial bank. At the end of 2011, their total balance sheet was EUR 716 billion of which their total loan portfolio to the public was EUR 337 billion (47%). The main interest rate benchmarks, Euribor, Libor and Stibor are the maximum short-term market interest rates that strong banks pay when borrowing from other banks and other big depositors in the short term financial markets. They pay much less than that when they take deposits from smaller depositors. Note that I use the words “short-term” and “strong banks”. The cost of short term borrowing for most strong banks, including Nordea and the other big Nordic banks, is well below these offered rates. This is to be expected because retail depositors use the governments’ deposit insurance schemes to protect their savings of cash against loss. It is a good assumption that strong banks the cost of short term borrowing has not changed during the last years. There can be no doubt that the cost of long term funding for banks has increased compared to several years ago. But the amount of the increase is probably around 0,5% for that part of their balance sheet that was funded with long term loans. Using Nordea Group’s 2011 balance sheet figures as a typical Nordic bank, you can see that 73% of their total funding (EUR 370 billion) was shorter than a year and only 10% (EUR 36 billion) was longer than 5 years, the rest, 18% (EUR 65 billion) being in between. Applying the average increase of long term borrowing costs of 0,5% to all of the long term borrowing produces a small increase of about 0,14%. Since the banks are still using cheap short term deposits to fund their long term loans it appears that banks could be justified in a small 0,14% increase if the loan contract allows them to do that, if their short term borrowing costs remain unchanged and other matters remain equal…