Unearned Interest Income: A Dilemma for Central Banks in the EU”?

In 2023, the European Central Bank (ECB) received approximately 130 billion euros in interest from banks in the euro zone. Two Hamburg economics professors, Bernd Lucke and Dirk Meyer, argue that this interest income is unearned and should be skimmed off by taxing it profit-neutrally within the Organisation for Economic Co-operation and Development (OECD). On the other hand, Commerzbank’s chief economist, Jörg Krämer, believes that banks receive a variable interest rate for selling government bonds to the ECB through interest rate swaps.

The ECB has pursued an expansive monetary policy for years with zero and negative interest rates and bond purchases worth trillions. While commercial banks in the Eurozone have been affected by negative interest rates for several years despite relief measures, they are currently benefiting from high deposit rates. However, this unearned income has resulted in losses for central banks like the German Bundesbank.

Lucke and Meyer propose taxing this unearned interest income to avoid competitive disadvantages for local banks. The tax would be based on excess reserves held by banks as of December 31, 2022, adjusted over time to match the interest payments made by the ECB. This proposal aims to eliminate wasteful spending by banks and redirect resources towards more productive activities.

Krämer argues that taxing deposits might not align with the ECB’s monetary policy goals as it would not reflect market forces or incentivize efficient allocation of resources. He suggests that instead of taxing deposits, governments could implement policies that encourage more lending or reduce liquidity levels in financial markets.

Despite their differences on how to address this issue, both Lucke and Meyer believe that unearned income generated by banks should be addressed to promote greater financial stability and reduce inequality in society.

In conclusion, while there are disagreements among economists and policymakers on how best to address unearned income generated by banks through taxes or other policies, it is clear that this issue must be addressed if we want to promote greater financial stability and reduce inequality in society.