By Francesco Canepa, Frank Sibelt, and Palaz Curani
FRANKFURT (Reuters) – The European Central Bank is studying ways to cut subsidies to banks that could cost banks tens of billions of euros in interest, four sources told Reuters, triggering a backslide by lenders.
To fight hyperinflation, the European Central Bank raised the rate it pays on 4.6 trillion euros ($4.5 trillion) of bank reserves in excess of requirements from -0.5% to 0.75% in less than two months.
This leaves the European Central Bank with tens of billions of euros in annual interest on those reserves and threatens to blow a hole in the capital of central banks in the countries where most of these reserves are located, with the Netherlands and Belgium already warning against it. Imminent losses.
It also puts the European Central Bank in the politically uncomfortable position of supporting banks at a time when the public is suffering amid rising inflation.
Banks in particular will make a guaranteed profit on the three-year loans they took from the ECB itself because the average interest they pay on Targeted Long Term Refinancing Operations (TLTRO) is less than what they could earn by depositing that. cash in the central bank.
For these reasons, European Central Bank staff are considering lower payment methods, such as not paying interest on any money that banks have borrowed from the central bank itself, sources close to the matter told Reuters.
The sources added that the ECB could also change the terms of the TLTRO loans, although this could damage the credibility of future programs and invite legal challenges.
Other proposals, the sources said, only include compensating excess reserves below or above the minimum or eliminating interest on minimum reserves – those banks are required to hold at the European Central Bank that currently yield 1.25% per annum.
A spokesman for the European Central Bank declined to comment.
The European Banking Union’s industry body has defended the existing favorable TLTRO terms, which were put in place by the European Central Bank at the height of the coronavirus outbreak.
“The TLTRO program and its terms are set in place with European banks taking risks to keep the economy afloat during the COVID pandemic,” it said in a statement.
The sources said that ECB policy makers feel that action is warranted if it is necessary to preserve capital, noting that lenders have benefited from very cheap loans in the past.
Policy makers discussed the topic only briefly at their September 8 meeting and are expected to revisit it in a dip in Cyprus on October 5 or at their October 27 political meeting – when the European Central Bank prepares to raise interest rates again.
The Swiss National Bank said on Thursday that it will pay interest only on reserves “up to a certain threshold” and French Central Bank Governor Francois Villeroy de Gallo supported a similar plan.
One of the problems the ECB faces is that different choices will affect member states in different ways.
Italian banks, for example, have borrowed more from the European Central Bank than they 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 “disabling effects on Italian financial markets” if the European Central Bank stopped compensating part of the money that Italian banks borrowed under the TLTRO.
Another problem is that the ECB has to justify any decision on the basis of monetary policy, rather than preserving its own profits or avoiding political embarrassment.
“The most important issue in this regard, and not the profit and loss statement, is the financial solidity of central banks’ balance sheets through the levels of their capital reserves,” Villeroy de Gallo of the Bank of France said in a recent speech.
(1 dollar = 1.0251 euro)