Banks rush to borrow record € 1.3 billion from ECB at negative rates
Banks have rushed to borrow a record € 1.3 billion from the European Central Bank at deeply negative interest rates, as part of the latest monetary policy campaign to boost liquidity in the eurozone coronavirus-hit economy.
This is the first time that a large central bank has offered multi-year loans to banks at an interest rate lower than its main deposit rate, introducing a so-called dual rate system.
The ECB said on Thursday that 742 banks had asked to borrow € 1.31 billion under its main refinancing program, which will lend them money over three years at rates as low as minus 1%, to condition of respecting certain loan thresholds.
Since the ECB’s main deposit rate is minus 0.5%, very low-cost loans are in fact a subsidy to the banking system and provide further evidence of how the ECB is doing everything to trying to prevent the pandemic from causing a credit crunch.
Frederik Ducrozet, strategist at Pictet Wealth Management, said that the higher-than-expected adoption “suggests that peripheral banks have probably taken a very large chunk of their additional allocations while core banks may have used about a third of their allocation. additional borrowing capacity ”.
Banks are expected to use around € 760 billion in ultra-cheap loans to repay past ECB loans that are about to fall due. But they are expected to use a large chunk of the remaining € 549 billion to buy bonds issued by their own governments – earning them an instant profit on the “carry trade” between the negative ECB rate and the higher yield on bonds. of state.
While this supports the € 1.1 billion to € 1.5 billion in additional debt that is expected to be issued by eurozone governments to fund their pandemic responses this year, analysts say it will add to the “disaster loop. More closely linking the fate of the banks to this. of their national governments. Italian banks, for example, already hold more than 425 billion euros of their own country’s debt, or more than 10% of their total assets.
“The increase in sovereign exposure of banks has generally been viewed as negative in recent years,” Jefferies banking analysts said in a note. “However, the policy direction is changing and with increasing levels of public debt, it may be wise for banks to channel excess liquidity in that direction.
The increase in the ECB’s bank lending program from just over € 1 billion to almost € 1.6 billion will inflate the central bank’s balance sheet to over € 6 billion – passing as the first time to more than half of the Union’s gross domestic product.
To secure the lowest rate of minus 1 percent on new loans, banks must keep their loans to households and businesses – excluding residential mortgages – at the same level as the previous year. Otherwise, the interest rate is minus 0.5 percent.
In the first weeks after the pandemic swept across Europe, banks sharply increased their lending to businesses – encouraged by large government guarantees – while lending to households declined. But analysts are skeptical that the ECB’s new lending will lead to a major increase in global lending.
“The ECB is happy to provide liquidity to banks which pass it on to businesses and households,” said Florian Hense, economist at Berenberg. “It remains to be seen whether the banks will ultimately need the money – and lend it – remains to be seen.”
In response to the pandemic, the ECB reinforced its main lending program for banks by reducing the interest rate, lowering the lending threshold required to obtain the lowest rate, increasing the total number of banks that can borrow and relaxing the rules on the collateral they can use.
The latest loan cycle is more than double the previous record amount of the ECB’s longer-term refinancing operation at the height of the euro area sovereign debt crisis in March 2012, when it distributed 530 billion euros in cheap loans to banks.
The central bank has already provided major support to eurozone debt markets by committing to buy € 1.35 billion in bonds over the next 12 months. This has helped lower borrowing costs for the southern European countries hardest hit by the pandemic, but it has also prompted critics to accuse the ECB of bailing out debauchery governments.
The ECB’s current € 2.2 billion sovereign debt purchase program is already facing a threat an explosive ruling last month by the German Constitutional Court, which ruled that the central bank had failed to properly assess the effects of its policy on economic and fiscal policy.
Thursday, anti-immigration Alternative for Germany The party told the country’s parliament that it plans to launch another legal challenge against the ECB’s recent € 1.35 billion emergency bond purchase program.
Additional reporting by Guy Chazan in Berlin