Banks have rushed to borrow a record €1.3tn from the European Central Bank at deeply negative interest rates, in the latest monetary policy drive to boost liquidity in the eurozone’s coronavirus-stricken economy.
It is the first time that a major central bank has offered multiyear loans to banks at an interest rate below its main deposit rate, introducing a so-called dual-rate system.
The ECB said on Thursday that 742 banks had applied to borrow €1.31tn under its main refinancing scheme, which will lend them money over three years at rates as low as minus 1 per cent, providing they meet certain lending thresholds.
Given the ECB’s main deposit rate is minus 0.5 per cent, the ultra-cheap lending is effectively a subsidy for the banking system and provides further evidence of how the ECB is pulling out all the stops to try to prevent the pandemic causing a credit crunch.
Frederik Ducrozet, strategist at Pictet Wealth Management, said the stronger than expected take-up “suggests that peripheral banks likely took a very large share of their extra allowances while core banks may have used about a third of their additional borrowing capacity”.
The banks are due to use about €760bn of the ultra-cheap loans to repay earlier ECB loans that are about to mature. But they are expected to use much of the remaining €549bn to buy bonds issued by their own governments — earning them an instant profit on the “carry trade” between the negative rate from the ECB and the higher yield on government bonds.
While this will support the €1tn to €1.5tn of extra debt expected to be issued by eurozone governments to fund their pandemic responses this year, analysts say it will add to the “doom loop” tying the fate of the banks more closely to that of their national governments. Italian banks, for instance, already own more than €425bn of their own country’s debt — more than 10 per cent of their total assets.
“Increased sovereign exposure by banks has typically been seen as a negative in recent years,” Jefferies banking analysts said in a note. “However, the policy stance is shifting and with government debt levels set to rise, it may make sense for banks to channel excess liquidity in this direction.”
The increase in the ECB’s bank lending programme from just over €1tn to almost €1.6tn will inflate the central bank’s balance sheet to above €6tn — rising to more than half the bloc’s gross domestic product for the first time.
To secure the lowest rate of minus 1 per cent on the new loans, banks must maintain their lending to households and businesses — excluding residential mortgages — at the same level as the previous year. Otherwise the interest rate rises to minus 0.5 per cent.
In the first few weeks after the pandemic swept across Europe, banks sharply increased their loans to companies — encouraged by significant government guarantees — while lending to households fell. But analysts are sceptical that the fresh ECB loans will lead to a major boost in overall lending.
“The ECB is happy to provide the liquidity to the banks which pass it on to businesses and households,” said Florian Hense, economist at Berenberg. “Whether the banks will ultimately need the money — and lend it out — remains to be seen.”
In response to the pandemic, the ECB beefed up its main lending scheme for banks by reducing the interest rate, lowering the lending threshold required to get the lowest rate, boosting the total banks can borrow and loosening the rules on what collateral they can use.
The latest round of lending is more than double the previous record amount for the ECB’s longer-term refinancing operation at the height of the eurozone sovereign debt crisis in March 2012 when it distributed €530bn of cheap loans to banks.
The central bank has already provided a major backstop for eurozone debt markets by committing to buy €1.35tn of bonds over the next 12 months. This has helped to lower the borrowing costs for the southern European countries hit hardest by the pandemic, but it has also prompted critics to accuse the ECB of bailing out profligate governments.
The ECB’s existing €2.2tn sovereign debt-buying programme already faces a threat from an explosive ruling last month by Germany’s constitutional court, which judged that the central bank had not properly assessed the economic and fiscal policy effects of its policy.
On Thursday, the anti-immigration Alternative for Germany party said in the country’s parliament that it planned to bring a fresh legal challenge against the ECB’s recent €1.35bn emergency bond-buying programme.
