The European Central Bank’s (ECB) interest rate hike is in its final stages, ECB Vice President Luis de Guindos told an Italian newspaper, warning that higher borrowing costs could hurt banks’ asset quality, even if indicators are currently healthy, Reuters reported.

The ECB has raised interest rates by a total of 3.75 percentage points since last July and has promised further hikes, but at a more measured pace of 0.25 percentage point increases, after excessive steps in the first part of its campaign to tighten monetary policy.

“Now we have entered the final stage of strengthening our monetary policy. And so we are returning to normal, to growth of 0.25 percentage points,” Guindos told Il Sole 24 Ore on Sunday.

These key interest rate hikes improve banks’ lending margins, but could also make debt repayment more difficult for some borrowers by increasing the share of non-performing loans.

“At the moment, the increase in margins more than compensates for potential losses from the increase in non-performing loans. The combination of a slowing economy and higher interest rates will increase the cost of funding for banks and possibly increase NPLs,” de Guindos said.

The ECB’s director of supervision, Andrea Enria, previously told Croatian newspaper Vecernji List that the ECB was seeing “some early signs” that loans are being repaid late, suggesting that the number of non-performing loans could rise.

“We don’t expect a wave of non-performing loans, but now is not the time to wait,” de Guindos added. d

e Guindos also warned about so-called shadow banks, a category that includes non-banking financial firms such as funds or insurance companies that face “some tension” because they are more exposed to liquidity risk.

Providing the ECB’s first assessment of the effects of a quantitative limit or cut on the bank’s massive government debt obligations, de Guindos said it had raised the yield on 10-year government bonds by 0.60-0.70 percentage point, with interest rate hikes having a much larger effect .