Since the start of the pandemic and the lockdowns, in March 2020, the European Central Bank (ECB) made liquidity funds of more than two trillion euros available to banks in the eurozone at negative interest of -1%. .
With the rise in rates applied now, the bank relocates those funds in the ECB at a positive 0.75%, a percentage that will rise as rates rise to tackle inflation. A round deal for banks, but too costly for the ECB.
When the Frankfurt-based institute decided to grant money at favorable conditions to European banks, its objective was to get credit to companies and thus reactivate the economy. They are called specific long-term refinancing operations, known by the acronym TLTRO.
However, the economic cycle has changed. We are in a radical turn, because since 2014 European banks paid the ECB to guard their money (as a form of penalty for not making it flow in the system). Now it’s the other way around.
“The ECB granted loans at an interest of up to -1% to the banks, which in part parked them in deposits that right now pay 0.75%, which for them is a benefit from heaven and an extra cost for the central bank. And the interest rate will increase at the next meeting, so your benefit will be greater and greater”, explains Joaquín Maudos, Professor of Economic Analysis at the University of Valencia.
According to these calculations, the banks that would benefit the most from this differential between (low-cost) loans and (increasingly higher) remuneration are the Germans, who would collect almost 20,000 million euros next year, followed by the French. The Spanish could find themselves with an extra 5,000 million euros, in charge of the ECB.
But at a time of risk of global recession and social unrest, they want to prevent the financial sector from taking advantage of the situation. In Frankfurt they want to take action on the matter as soon as possible, since the ECB’s deposit rate could reach up to 3% in 2023, which would trigger the central bank’s interest spending.
“In this economic environment, the case of monetary policy, clearly shows that it is necessary to discuss the requirements of the TLTRO,” Gediminas Simkus, a member of the ECB Governing Council and Governor of the Bank of Lithuania, said yesterday. “My opinion is that we have to discuss this at the next monetary policy meeting” [scheduled for Oct. 27].
There are three options. The simplest would be to unilaterally modify the conditions so that the money deposited in the ECB is not remunerated at the deposit rate. This would have the advantage that all banks would be penalized equally. But this path could pose a legal hurdle, with the banks possibly taking legal action.
Another hypothesis would be that cash from excess liquidity would be treated similarly to the minimum reserves held by commercial banks at the ECB. These reserves are currently remunerated at 0.5%, a quarter of a point below the ECB deposit rate.
A third option would be to create a kind of ranking that would allow banks to receive more favorable treatment up to a certain threshold, after which a lower rate would be applied. The decision is not made yet. But parties don’t usually last forever and it’s always time to pay the bills.
