Banks cast doubt on impact of ECB giveaway
With its radical plan to in effect pay banks to lend money, the European Central Bank signalled its intent to boost credit growth and inflation, focusing its firepower away from financial markets and on the real economy.
But the idea announced last week has been met with scepticism by the banking industry, with many doubting whether Frankfurt’s latest measure will generate the desired effect.
A series of auctions planned by the ECB will effectively subsidise lending to businesses and consumers across the eurozone area — which has until now relied heavily on the central bank’s now-€80bn per month quantitative easing programme. The ECB views the cash giveaway as a better way to ensure its actions benefit normal companies and people, as well as markets.
At worst, eurozone banks will pay nothing for a four-year loan from the central bank. And if they expand their loan books, the ECB could pay them as much as 0.4 per cent a year. That figure is in line with the central bank’s minus 0.4 per cent deposit rate — which lenders claim erodes their profits.
The ECB believes the giveaway will motivate banks to revive credit creation in a region where lending conditions are just starting to thaw. The auctions will run once a quarter from June until March 2017.
Banks think otherwise.
The economic and financial climate, lenders say, means even subsidised lending will fail to change the game. While the measures known as targeted longer-term operations — or TLTROs — will pump further liquidity into the system, they say it will not address the other constraints on banks’ balance sheets.
Waleed El-Amir, executive vice-president and head of group finance at UniCredit, the Italian bank, said: “For most banks it has not been an issue of liquidity, but an issue of capital. And also credit quality.”
Christoph Rieger, head of rates and credit research at Germany’s Commerzbank said: “It will clearly help some banks by replacing more expensive forms of funding.
“But most, especially core banks, are awash with liquidity. They are not constrained by a lack of liquidity, but first and foremost by a lack of capital.”
Rules on the capital banks’ need to hold against their assets have been toughened since the financial crisis. While banks are now paid to hold more liquidity, regulation combined with lower profits have also made capital more costly.
Mr Rieger continued: “Capital is still scarce and expensive. And there are concerns that regulators could introduce measures which require banks to hold capital against sovereign debt. That is not the sort of situation in which banks can easily expand balance sheets.”
The auctions, the idea of Massimo Rostagno, the ECB’s head of monetary policy, and Ulrich Bindseil, its director of market operations, will work in tandem with newly announced purchases of corporate debt, made under the QE programme.
Bankers say the combination of the corporate bond purchases and subsidised lending should boost credit creation a little. But the purchases of corporate debt will, for them at least, offset some of the benefits of the TLTROs.
The ECB’s entry into the corporate debt market will lower yields on bonds, meaning companies will pay less to borrow. Banks could need to lower their margins on business lending to compete.
“The new TLTRO will potentially cheapen the cost of funding for the banks,” Mr El-Amir said. “But some of these gains may be lost on the asset side [of banks’ balance sheets] through the corporate bond purchase programme, which is likely to cause corporate spreads to tighten.”
Said Mr Rieger: “There are still not a lot of profitable projects out there.”
ECB surveys of eurozone banks indicate that businesses want more loans. But bankers say people are now so wary of the economic backdrop that they do not want to take on more debt, no matter how cheap it is to borrow.
“The bottleneck is not supply, it is demand,” said Lars Hofer, a spokesperson for Germany’s banking association. “Corporates, especially [smaller ones], have a wide variety of funding options. Since the crisis, they have diversified and become less reliant on bank credit.”
Marco Stoeckle, Commerzbank’s head of corporate credit research, said that in his view, European companies were not crying out for funding liquidity.
“The problem at the moment is that corporates don’t have a lot of opportunities to invest in. The benefit [from the ECB buying corporate bonds] beyond the signal [it sends] is very limited.”
Instead, he warned “it could do more harm than good by severely distorting the European corporate bond market.”