🚀 AI-picked stocks soar in May. PRFT is +55%—in just 16 days! Don’t miss June’s top picks.Unlock full list

ECB needs to stop subsidizing banks, Holzmann says

Published 04/03/2024, 01:08 AM
Updated 04/03/2024, 01:10 AM
© Reuters. FILE PHOTO: European Central Bank policymaker and Governor of the Austrian National Bank Robert Holzmann addresses the media in Vienna, Austria, March 23, 2023. REUTERS/Leonhard Foeger/File Photo

By Balazs Koranyi and Francois Murphy

VIENNA (Reuters) - The European Central Bank needs to stop subsidizing commercial banks and should cut interest payments on the piles of cash lenders got from the central bank on the cheap, Austrian central bank Governor Robert Holzmann said.

Commercial banks are sitting on 3.2 trillion euros worth of excess liquidity, parking this at the ECB at a 4% rate, pushing the ECB and many of the euro zone's national central banks deep into the red.

"There’s no monetary policy reason why we should offer this subsidy," said Holzmann, who also sits on the ECB's 26-member Governing Council.

"It's not acceptable that the current structure puts major burden on the financial outcomes of central banks," Holzmann told Reuters in an interview. "We cannot run deficits without an end in sight, it can’t be the case."

At the core of the issue is the ECB's large scale money printing operation, also known as quantitative easing, which was the hallmark of its stimulus efforts over the past decade.

The ECB printed trillions of euros to buy government bonds in the hope that abundant and cheap credit would rekindle economic growth and push inflation back up to 2%.

When interest rates were negative, this had little cost to the ECB but it must now pay a 4% interest rate on the funds it handed to lenders and this expense far outweighs any income.

Since it will take years for the bond pile to shrink, the payments are likely to remain a long-term expense and some central banks could burn through most if not all profit reserves.

Partly as a response, the ECB last year decided to require banks to keep 1% of excess reserves at the central bank unremunerated.

Some policymakers, including Bundesbank President Joachim Nagel, pushed for a higher ratio, but failed to garner support, even as the German central bank had a net interest income of negative 13.9 billion euros in 2023.

Holzmann said he was not ready to give up this fight and wanted to cut payments to banks.

© Reuters. FILE PHOTO: European Central Bank policymaker and Governor of the Austrian National Bank Robert Holzmann addresses the media in Vienna, Austria, March 23, 2023. REUTERS/Leonhard Foeger/File Photo

"For me, the discussion is certainly not settled," he said, arguing that unremunerated reserves should be between 5% and 10%.

"For me, it’s a way of a clawback," Holzmann said.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.