Breaking News

Negative Deposit Rates To Force Eurozone Core Banks To Repay LTRO Funds

By Sober LookMarket OverviewDec 30, 2012 02:36AM ET
Negative Deposit Rates To Force Eurozone Core Banks To Repay LTRO Funds
By Sober Look   |  Dec 30, 2012 02:36AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

There is concern among some eurozone banks that the ECB may push the deposit rates on excess reserves into negative territory next year. In fact the 12-month EUR OIS rate (the so-called EONIA swap rate), which is the market expectation of where the overnight rates will be next year, briefly dipped below zero recently.


If that were to happen, banks would in effect be penalized for holding excess reserves at the ECB. Such action would force those who are able (more likely the core banks) to pay down their borrowings from the ECB (otherwise they are paying 1% for the LTRO funding and then paying again for depositing the cash at the ECB).

JPMorgan: There has been renewed speculation that the ECB will set a negative rate on its deposit facility. Indeed, the EONIA curve, which tracks the deposit facility, dipped into negative territory for the first time last week. Negative interest rates on deposits are like safe deposit charges – the idea is that they should incentivize banks to lend out money rather than suffer an erosion of capital.

Core banks are more susceptible to negative deposit rates. The first response by core banks would be to repay back most of the extra funds they borrowed via the 3y LTROs, which they can do from January 30th. We previously argued that core banks could repay €100bn of 3y LTRO funds as yield compression makes carry trades less attractive. But an ECB deposit rate cut to -25bp could induce them to pay back perhaps all of the €140bn they borrowed on net via the 3y LTROs.

In preparation for this potential event, banks have been paying down the shorter term LTRO balances (not all LTRO is 3 years). In fact the ECB is showing a gradual but consistent decline in LTRO funding provided to the euro area banks.

According to JPMorgan, the effect of a negative deposit rate on excess balances would help the eurozone periphery by pushing capital out of the core.

JPMorgan: ... an ECB rate cut to -25bp could accelerate that process [of paying down LTRO]. In trying to avoid negative carry, the resulting search for yield and increase in the velocity of reserves, i.e. passing on the “hot potato,” within the euro area banking system is likely to improve capital flows back to peripheral banks and reduce TARGET2 imbalances, especially now that the ECB has back-stopped the system with OMT. From this perspective, negative deposit rates could be a useful policy tool to induce financial re-integration in the eurozone and ultimately allow the periphery to reduce its reliance on the ECB.

Of course one of the reasons the Fed hasn't followed this path is a potential disruption to the money markets. Even the recent drop to zero rate on deposits by the ECB has caused havoc for euro denominated money market funds (see discussion). A negative rate would force money market firms to simply kick the existing depositors out, forcing them into periphery government paper or periphery banks - which of course is the idea behind negative rates.

Negative Deposit Rates To Force Eurozone Core Banks To Repay LTRO Funds

Related Articles

Negative Deposit Rates To Force Eurozone Core Banks To Repay LTRO Funds

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Post also to:
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Post 1000
Please wait a minute before you try to comment again.
Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Add Chart to Comment
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email