ECB seeks to cut subsidy to banks as rate hikes leave it on hook, sources say

By Francesco Canepa, Frank Siebelt and Balazs Koranyi

FRANKFURT (Reuters) -The European Central Financial institution is learning methods of reducing a subsidy to banks that stands to value it tens of billions of euros in curiosity, 4 sources informed Reuters, prompting pushback from lenders.

To combat runaway inflation, the ECB has raised the speed it pays on the 4.6 trillion euros ($4.5 trillion) price of banks’ reserves that exceed necessities from -0.5% to 0.75% in lower than two months.

This leaves the ECB on the hook for tens of billions of euros in annual curiosity on these reserves and threatens to burn a gap within the capital of the central banks in international locations the place a lot of the these reserves sit, with the Netherlands and Belgium already warning about imminent losses.

It additionally places the ECB within the politically uncomfortable place of subsidising banks at a time when the general public is struggling amid excessive inflation.

Banks particularly stand to make a assured revenue on three-year loans they’ve taken out from the ECB itself as a result of the typical curiosity they pay on these Focused Longer-Time period Refinancing Operations (TLTRO) is decrease than what they’ll earn by depositing that very same money on the central financial institution.

For these causes ECB workers are analyzing methods to pay much less, resembling not paying curiosity on any money that banks have borrowed from the central financial institution itself, the sources near the matter informed Reuters.

The ECB may additionally change the phrases of TLTRO loans, though this may doubtlessly harm the credibility of future programmes and invite authorized challenges, the sources added.

Different proposals embrace solely remunerating extra reserves beneath or above a threshold or scrapping curiosity on minimal reserves – those who banks must preserve on the ECB and which at the moment yield 1.25% a yr, the sources mentioned.

A spokesperson for the ECB declined to remark.

The European Banking Federation business physique defended the present, beneficial TLTRO phrases, which have been set by the ECB on the peak of the coronavirus outbreak.

“The TLTRO programme and its phrases have been put in place as European banks took on threat to maintain the financial system afloat throughout the COVID pandemic,” it mentioned in an announcement.

However ECB policymakers really feel justified in taking motion if that’s wanted to protect capital, the sources mentioned, noting that lenders had benefited from the ultra-cheap loans prior to now.

Policymakers solely briefly mentioned this matter at their Sept. 8 assembly and are anticipated to revisit it at a retreat in Cyprus on Oct. 5 or at their coverage gathering on Oct. 27 – when the ECB is ready to lift charges once more.

The Swiss Nationwide Financial institution mentioned on Thursday it will solely pay curiosity on reserves “as much as a sure threshold” and French central financial institution governor Francois Villeroy de Galhau has additionally championed an analogous plan.

One subject for the ECB is that completely different choices would have an effect on member international locations in several methods.

Italian banks, as an illustration, have borrowed extra from the ECB than they’ve deposited there in extra reserves, whereas the other is true for many different international locations and particularly for Germany, France and the Netherlands.

Dutch financial institution ING noticed “disrupting results on Italian cash markets” if the ECB stopped remunerating a part of the cash borrowed by Italian banks underneath TLTRO.

One other drawback is that the ECB has to justify any choice on financial coverage grounds, relatively than to protect its personal earnings or keep away from political embarrassment.

“The extra related subject on this regard, relatively than our revenue and loss assertion, is the monetary solidity of central banks’ stability sheets by way of their ranges of capitalized reserves,” Banque de France’s Villeroy de Galhau mentioned in a current speech.

($1 = 1.0251 euros)

(Reporting by Francesco Canepa, Frank Siebelt and Balazs Koranyi; Modifying by Hugh Lawson and Mark Potter)