Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

ECB seeks to cut subsidy to banks as rate hikes leave it on hook, sources say

Economy Sep 23, 2022 12:46PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Signage is seen outside the European Central Bank (ECB) building, in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay/File Photo

By Francesco Canepa, Frank Siebelt and Balazs Koranyi

FRANKFURT (Reuters) -The European Central Bank is studying ways of cutting a subsidy to banks that stands to cost it tens of billions of euros in interest, four sources told Reuters, prompting pushback from lenders.

To fight runaway inflation, the ECB has raised the rate it pays on the 4.6 trillion euros ($4.5 trillion) worth of banks' reserves that exceed requirements from -0.5% to 0.75% in less than two months.

This leaves the ECB on the hook for tens of billions of euros in annual interest on those reserves and threatens to burn a hole in the capital of the central banks in countries where most of the those reserves sit, with the Netherlands and Belgium already warning about imminent losses.

It also puts the ECB in the politically uncomfortable position of subsidising banks at a time when the public is struggling amid high inflation.

Banks in particular stand to make a guaranteed profit on three-year loans they have taken out from the ECB itself because the average interest they pay on those Targeted Longer-Term Refinancing Operations (TLTRO) is lower than what they can earn by depositing that same cash at the central bank.

For these reasons ECB staff are examining ways to pay less, such as not paying interest on any cash that banks have borrowed from the central bank itself, the sources close to the matter told Reuters.

The ECB might also change the terms of TLTRO loans, although this would potentially damage the credibility of future programmes and invite legal challenges, the sources added.

Other proposals include only remunerating excess reserves below or above a threshold or scrapping interest on minimum reserves - those that banks have to keep at the ECB and which currently yield 1.25% a year, the sources said.

A spokesperson for the ECB declined to comment.

The European Banking Federation industry body defended the existing, favourable TLTRO terms, which were set by the ECB at the height of the coronavirus outbreak.

"The TLTRO programme and its terms were put in place as European banks took on risk to keep the economy afloat during the COVID pandemic," it said in a statement.

But ECB policymakers feel justified in taking action if that is needed to preserve capital, the sources said, noting that lenders had benefited from the ultra-cheap loans in the past.

Policymakers only briefly discussed this topic at their Sept. 8 meeting and are expected to revisit it at a retreat in Cyprus on Oct. 5 or at their policy gathering on Oct. 27 - when the ECB is set to raise rates again.

The Swiss National Bank said on Thursday it would only pay interest on reserves "up to a certain threshold" and French central bank governor Francois Villeroy de Galhau has also championed a similar plan.

One issue for the ECB is that different options would affect member countries in different ways.

Italian banks, for instance, have borrowed more from the ECB than they have deposited there in excess reserves, while the opposite is true for most other countries and especially for Germany, France and the Netherlands.

Dutch bank ING saw "disrupting effects on Italian money markets" if the ECB stopped remunerating part of the money borrowed by Italian banks under TLTRO.

Another problem is that the ECB has to justify any decision on monetary policy grounds, rather than to preserve its own profits or avoid political embarrassment.

"The more relevant issue in this regard, rather than our profit and loss statement, is the financial solidity of central banks’ balance sheets through their levels of capitalized reserves," Banque de France's Villeroy de Galhau said in a recent speech.

($1 = 1.0251 euros)

ECB seeks to cut subsidy to banks as rate hikes leave it on hook, sources say
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other 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, don’t trash it.

  •           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. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. 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.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
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?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email