European banks get financial boost thanks to ECB credit movements

The European Central Bank wants to ensure that credit flows into the European economy to support its recovery as the pandemic continues. Banks cash in.

Eurozone banks make money through an ECB program that essentially remunerates them for lending, increasing their income, 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 liquidity to businesses to avoid a credit crunch. Lending incentives are particularly important in Europe, as companies rely heavily on borrowing from banks, unlike the United States, where companies issue bonds more often.

Longer-term Targeted Refinancing Operations, or TLTROs, were created in 2014. The ECB relaxed the deal for banks last year by lowering the interest rate on its loans to as little as minus 1% . Banks are therefore paid to borrow from the central bank. In return, lenders must meet loan targets.

Many banks borrow even though they have ample liquidity to take advantage of the deal. In the last cycle of the program in June, banks took some 110 billion euros, the equivalent of $ 129 billion, from the ECB. This brought the total amount outstanding under the TLTRO to over € 2,000 billion, compared to less than € 1,000 billion 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 rating firm Scope Ratings.

In the first half of the year, both large and small banks saw gains from the program. The Italian UniCredit SpA achieved a turnover of 429 million euros. German bank AG

made 282 million euros. The German lender said it expects revenues from its corporate banking activities to be stable this year, in part thanks to the TLTRO’s gains. Dutch lender ING Groep NV has also recorded earnings gains of EUR 316 million so far this year.

“This quarterly benefits from our participation in [program] is welcome, but it provides only limited relief against the loss of income due to the prolonged negative interest rate environment, ”said an ING spokesperson, adding that banks continue to face a downturn. severe squeeze in margins 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 into the funding market. For those who sell bonds, the cost tends to go down due to the limited supply.

Tom Kinmonth, bond strategist at Dutch bank ABN AMRO Bank NV, said the covered bond issue, the cheapest form of bank debt, fell this year to € 52.6 billion as high as € 52.6 billion. 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 keep their reserves. additional. The ECB started charging in 2014 to encourage banks to lend more.

While the rates applied to all banks in the euro area, they hit lenders in the North more because they had more additional funding. Their struggling peers in southern countries like Italy, Spain and Portugal have historically benefited more from TLTROs.

Since last year, banks in Germany, the Netherlands and France have been able to offset the costs of ECB deposits with earnings from TLTROs, according to Frederik Ducrozet, economist at Pictet Wealth Management in Geneva.

“There is no doubt that the program has helped to mitigate the impact of negative interest rates on banks,” said Ducrozet. “That said, the ECB’s monetary policy remains a drag on their income.”

Write to Patricia Kowsmann at [email protected]

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