The European Central Bank wants to ensure that credit flows into the European economy to support its recovery as the pandemic drags on. Banks collect.
Eurozone banks are making money from an ECB program that essentially pays them to lend, boosting revenue and helping to offset some of the costs associated with the continent’s long-standing negative interest rates.
The program shows how willing the ECB has been to keep eurozone economies afloat during the coronavirus pandemic by releasing a flood of cash for businesses to stave off a credit crunch. Lending incentives are particularly important in Europe because companies rely heavily on borrowing from banks, unlike in the United States, where companies issue bonds more often.
So-called Targeted Longer-Term Refinancing Operations, or TLTROs, were created in 2014. The ECB sweetened the deal for banks last year by lowering the interest rate on its loans to minus 1%. Thus, banks are paid to borrow from the central bank. In exchange, lenders must meet lending targets.
Many banks borrow even though they have enough cash to take advantage of the deal. In the last round of the program in June, banks took some 110 billion euros, or the equivalent of $129 billion, from the ECB. This brought the total outstanding under the TLTRO to more than €2 trillion, from less than €1 trillion before the rate cut. This represents about half of the total excess liquidity in the euro area banking system.
“For banks, a funding cost of minus 1% is very hard to beat,” said Marco Troiano, co-head of financial institutions at ratings firm Scope Ratings.
In the first half of the year, both small and large banks saw gains from the program. The Italian UniCredit SpA recorded 429 million euros in revenue. German Bank HER
achieved 282 million euros. The German lender said it expects revenue from its corporate banking business to be flat this year, thanks in part to TLTRO gains. Dutch lender ING Groep NV has also reported revenue gains of 316 million euros so far this year.
“This quarterly benefits from our participation in the [program] is very welcome, but it provides only limited relief against the loss of revenue due to the prolonged negative rate environment,” an ING spokesperson said, adding that banks continue to face a severe margin compression between what they charge customers for loans and how much they make on deposits.
An ECB spokesperson said TLTROs also reduce the need for lenders to tap the market for funding. For those selling bonds, the cost tends to drop due to the limited supply.
Tom Kinmonth, bond strategist at Dutch bank ABN AMRO Bank NV, said the issuance of covered bonds, the cheapest form of bank debt, has collapsed this year to 52.6 billion euros until now well below repayments of 97 billion euros.
TLTROs have been particularly important for northern European countries over the past year, as they have been hit hardest by a 0.5% interest rate that the ECB charges banks to hold their reserves. additional. The ECB started charging in 2014 to encourage banks to lend more.
While the rates applied to all eurozone banks, it hit northern lenders harder because they had more additional funds. Their struggling peers in southern countries such as Italy, Spain and Portugal have historically benefited more from TLTROs.
According to Frederik Ducrozet, an economist at Pictet Wealth Management in Geneva, since last year, banks in Germany, the Netherlands and France have been able to offset the costs of ECB deposits with gains from TLTROs.
“There is no doubt that the program has helped to mitigate the impact of negative interest rates on banks,” Ducrozet said. “That said, the ECB’s monetary policy remains a drag on their revenues.”
Write to Patricia Kowsmann at [email protected]
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