Banks' interest margins after the interest rate turnaround: Windfall profits and policy measures aimed at bank resilience and consumer welfare

The European Central Bank's interest rate hikes since July 2022 have been passed on to customers by banks on credit markets to a much greater extent than on deposit markets. As a result, banks' net interest margins have risen extraordinarily sharply. An analysis of the interest rate pass-through on individual submarkets in Germany shows that interest rates for overdrafts have increased the most and interest rates for overnight deposits the least. The banks' increased interest profits are therefore at the expense of lower-income households in particular. The additional profits made by banks compared to previous periods can be attributed to the high interest rates on their central bank deposits, market power in individual customer segments, a low willingness of customers to switch, and ineffective usury legislation. To prevent unearned windfall profits in advance without jeopardizing the resilience of banks, we propose increasing unremunerated minimum reserve requirements by the central bank, strengthening competition policy in the banking sector, limiting banks' dividend distributions, improving consumers' financial information and education, offering them a regulated savings product, and reforming interest rate ceilings on credit markets. A windfall profits tax should remain a measure of last resort.