The Institute of Public Finance and the Croatian National Bank organized a presentation on June 4, 2025, based on an article published in journal Public Sector Economics in which Mislav Brkić (Croatian National Bank) analyses the impact of the European Central Bank’s (ECB) restrictive monetary policy on the profitability of banks in the euro area during the 2022–2023 period.

Brkić identifies key factors that contributed to the strong growth of net interest income and bank profits during that period. First, as the euro area banking system was flooded with liquidity, banks were able to earn substantial interest income by simply keeping their abundant excess reserves in the ECB’s overnight deposits. Second, interest rates on bank loans – both on new loans and outstanding variable rate loans – rose sharply in line with the ECB’s policy rates, thus boosting banks’ interest income. However, differences existed among countries – in Croatia, the increase in interest rates was more moderate due to the high share of fixed-rate loans. Third, relatively weak growth in interest expenses supported bank profitability, as the majority of banks’ funding came from transaction accounts, which were only marginally affected by the rise in the ECB’s key interest rates.

There is no doubt that the experience gained in the aftermath of the COVID-19 pandemic will affect the way governments and central banks respond to severe crises in the future. The risk of unintended inflationary effects should be taken more seriously when preparing fiscal responses to future crises.

The lecture was moderated by Dubravko Mihaljek, co-editor at the journal Public Sector Economics. 

Photo: Božidar Bengez/CNB