Real estate credit: the ECB pushes for the adoption of floating rates in France

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, in relation The Parisian November 23rd.

As explained Capital last September, in a context of interest rates on loans limited by the usury rate, with fixed rates excluding insurance often above 2% with a consequent block on loans, some banks began to offer variable rate loans. Variable credit allows banks to offer an interest rate that changes over the life of the loan. The rate is generally indexed to the EURIBOR bank lending rate (average interest rate at which financial institutions lend money to each other on the eurozone interbank market).

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Variable tariffs offer the advantage of being more accessible to families with limited incomes. Therefore, the ECB would like to generalize its use in France to facilitate access to mortgages. An initiative that is not shared by the French Banking Federation (FBF). “These rates vary according to the economic situation and inflation. They can endanger individuals in the event of a drastic increase and lead to a wave of insolvencies. This is not our French model, unique and protective “, judges a FBF official questioned by The Parisian.

French banks have obtained the concession of a “transitional regime” until 2023, an exception that the ECB does not intend to extend. “We are trying to plead our case with Bercy, to warn the regulator, but we are having a hard time being heard. If the noose becomes too tight, one day we will be forced to let go of our model,” warns the FBF.


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The specter of the 2008 crisis

By favoring fixed rates, French banks are losing money, because refinancing rates are much higher than the interest rates charged when lending to individuals. However, banking institutions compensate for these losses through other sources of income. In general, in the French system, it is the banks that bear most of the risks associated with the granting of loans. Floating rates transfer this 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.

In 2008, several million American households were unable to pay their loan dues and, as a knock-on effect, deprived banks of sufficient liquidity to stay afloat, which led to a general crisis of the global financial system. “By imposing variable rates on us, the regulator wants the good of the banks. On the other hand, it must clearly understand that the risk will not disappear, but that it will be transferred to private individuals. Do we really want to increase the risk of defaulting and over-indebted French families? asks an executive of a popular bank quoted by The Parisian.


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