It is always said that European banks suffer, amongst other things, from the low interest rate environment governing the Eurozone. And that in a rising interest rate environment, banks' profitability will rise. I want to believe but I find no logical conclusion.
Say the ECB raises its refinancing rate (i.e. the rate of unsecured borrowing from the ECB), then of course a European bank can charge more from clients for borrowing. But first, a source of funding, namely that of the ECB, gets more expensive for a bank. But at the same time the interest rate on its deposit funding is also rising. Is it simply a case that the bank raises its lending rate far more than the rise in deposit funding interest? Furthermore, as stated in the St. Louis Fed Report, a bank's maturity profile to lend for longer maturities and borrow short-term means that a rising interest rate environment will lead to higher short-term costs. Many of these factors should lead to downward pressures on the Net Interest Margin. I do not see how this leads to improved profitability.
Furthermore, the other rate the ECB has at its disposal is the deposit rate. If this is raised then any money the bank parks at the ECB will generate greater returns, but surely the amount parked at the ECB is inconsequential in comparison the scope of the bank's activities. Anyone who can illustrate why my thinking is wrong is greatly appreciated.