How does the ECB control interest rates?
Nothing is stopping the private bank from doing that except common sense and a self-preservation instinct. If a commercial bank in say, France, was offering mortgages at 1.5% when the ECB prime rate is 3%, even the ECB would be lined up to borrow money from the bank in France. This French bank would quickly run out of funds as every prospective borrower in Europe borrowed money at 1.5%. I can tell you understand these concepts, most people don’t. So you probably also know that banks lend out far more money than they actually have in their possession, physically. At the end of the day, they have to mark their assets and liabilities to market. They have to balance their books. At the end of the day, the French bank would have lent out all the money it possibly could, represented by $100x, at a rate of 1.5%. These mortgages would be assets. However, the French bank only had $x in its possession. It had to borrow the other $99x from the ECB, at 3%! At the end of one day, the French bank wo
