Commercial banks currently earn €140bn in profits because the European Central Bank pays much higher interest on the €3.6 trillion excess reserves than the commercial banks pay depositors.

Dutch bank ING, for example, pays depositors 1.5 percent interest rates — lower if savings are more than €10,000 — while the ECB pays the bank a deposit rate of four percent.

According to figures published this month, the Dutch bank nearly doubled its net profits in 2023 to €7.3bn.

In a press release, ING chief executive Steven van Rijswijk attributed the bank’s successful year to “higher net interest income and our continued low-risk cost.”

ING is not an exception. The Bank of Ireland announced similarly high-profit growth numbers and pledged to more than triple shareholder returns, announced on Monday.

Italy’s UniCredit has pledged to distribute its whole 2023 profit of €8.6bn to investors. UBS intends to increase dividend payouts by 27 percent in May.

Overall, top EU banks have announced €47bn in stock buybacks and €74bn in dividends — the highest since the 2008 financial crisis.

But while banks are reaping record windfall profits, ING’s van Rijswijk described 2023 as a “challenging year”, citing political and economic shocks.

Bank executives have been under increasing shareholder pressure to increase payouts after years of relatively meagre returns.

Part of the challenge facing banks came from governments.

Spanish example

In response to outsized profits in the banking sector, some governments, including Spain, Hungary, the Czech Republic, and Lithuania, announced windfall taxes for banks.

Spain, for example, instituted a 4.8 percent windfall tax on banks in 2023, which it plans to extend into 2024.

The Italian government sent banking stocks tumbling in August last year when it announced a 40 percent one-off tax on bank profits.

However, windfall taxes have proven controversial among business leaders, and governments have often earned far less than initially expected.

Following an intense round of discussions with banks, Italy’s ministry of finance watered down the windfall tax, allowing banks to bypass paying the tax.

Too generous?

Meanwhile, some economists are concerned the ECB is being overly generous.

Central banks across Europe are registering losses due to the high-interest rate payouts.

The London School of Economics professor of economics, Paul de Grauwe, has described the ECB policy as a bank subsidy.

He has also called on the ECB to raise the minimum level of reserves over which it does not pay out interest rates.

This was done in 2019 when the ECB introduced a so-called two-tiered system, which in effect exempted commercial banks from paying interest to the central bank over their reserves when rates were negative.

In a recent open letter by the NGO Positive Money — co-signed by a group of economists, including de Grauwe, and MEPs, including vice president of the Greens Bas Eickhout MEP — called on the ECB to institute a similar system to reduce “excess” payouts to commercial banks.

ECB president Christine Lagarde will discuss monetary policy in the EU Parliament in Strasbourg on Monday evening.