Advisor | March 2023

A rate hike is a necessary evil to reduce consumption and stop inflation. However, such maneuvers, controlled by the central bank, have side effects on real economy and retail banking.

First of all, more pressure on the cost of money for families – under such weight, families are inevitably forced to reduce consumption, with an obvious impact on companies producing goods and services. 

The aim is to generate economic recession to stop the price increase, according to a rule as old as mankind: the demand decreases and prices follow suit.

However, this is like throwing water on fire to save a house from the flames: the more the water, the more the damage to the house, which ends up flooded instead of burnt.

Financial professionals and bankers tend to take great satisfaction in witnessing to a price increase: the raw material they trade – that is, money – grows in value and so do the profits of their banks.

However, this is often a Pyrrhic victory, which might, in the long run, distract bankers (mostly, the leaders of retail banks, very much rooted in the territory) from the true priorities of their banks.

The first priority of a bank should be granting credit to deserving families and businesses that are in a position to return it at sustainable rates.

When this does not occur (as evidenced by the recent past), the bank suffers: non-performing loans are often accompanied by downward spirals, very hard to overcome without years of tears and blood. 

The second priority for banks is promoting asset management. In a perfect world, this activity should result in a double win: a win for banks, whose activity of financial consultancy is remunerated.

And a win for clients, whose assets – if well managed – should grow despite inflation.

However, when a bank is led by a short-sighted manager, whose vision is limited to the nearest trimester rather than being oriented towards the centuries ahead, the risk is very high.

Namely, the risk of lowering the guard on the two pillars of traditional banking, that is provision of credit and asset management.

In a context dominated by high rates, a short-sighted banker, blinded by quick profit, is less inclined to consider the advantages of credit or to invest in retail banking activities.

Retail banking includes traditional banking services (banking operations led through efficient digital platforms), but also asset management and insurance products.

Short-sighted bankers see the trimester only: in the event of a rate hike, they contribute to enriching their banks and making its value grow, without much effort.

Of course, this kind of banker is less inclined to invest in people, in their training, in clients and in the quality of asset management products, which require large investments, time and perseverance.

Easy money has always blinded greedy and short-sighted men, with no exception of class or profession.

The Country, families and businesses need, today more than in the past, bankers who are ahead of their time, with their eyes on the long term.

Nicola Ronchetti