Banks Take $252 Billion Free ECB Cash With QE Exit in Mind
ECB Ending Four-Year Loans Makes Banks Focus on Stimulus Exit
(Bloomberg) -- Euro-area lenders took 233.5 billion euros ($252 billion) in free long-term loans from the European Central Bank as they prepare for the potential end of extraordinary stimulus.
The take-up in the last of the ECB’s Targeted Longer-Term Refinancing Operations -- four-year loans at a rate that starts at zero and could go lower -- compares with a median estimate of 110 billion euros in a Bloomberg survey, with predictions ranging from 30 billion euros to 750 billion euros. The net amount after repayment of 16.7 billion euros from earlier TLTROs is the largest since the program started.
The operation gives the ECB an insight into lenders’ expectations about the path toward the end of a stimulus spree that also includes negative rates and 2.28 trillion euros in asset purchases. While current guidance foresees a significant pause between the end of the ECB’s bond-buying program -- predicted in an earlier Bloomberg survey to be around mid-2018 -- and the first rate increase, some ECB policy makers have said that gap could be shortened or the sequence reversed.
On Thursday, ECB President Mario Draghi signaled time is running out for banks to get their house in order.
“The banking sector’s capacity to fully support the euro area’s recovery is curtailed by its low profitability,” Draghi said in the annual report for the ECB’s bank-supervision arm. “Overcapacities, inefficiencies and legacy assets contribute to banks’ low profitability. It is up to the banks themselves to find appropriate answers to these challenges. And for the sake of a strong recovery in the euro area, they must do so quickly.”
Italian Bids
Italian lenders were among the 474 bidders that chose to lock-in cheap funding before it’s too late. UniCredit SpA, the nation’s biggest bank, borrowed 24.4 billion euros. Intesa Sanpaolo SpA took about 12 billion euros, BPER Banca SpA 4.1 billion euros, Banco BPM SpA 3.1 billion euros, and Mediobanca SpA 1.5 billion euros. Unione di Banche Italiane SpA, Credito Valtellinese SC and Banca Carige SpA took up 2.5 billion euros, 1 billion euros and 500 million euros respectively.
The ECB started its first series of TLTROs in September 2014, with a second series on more lenient terms getting under way last year. The 12 operations have delivered 834 billion euros to lenders, excluding a rollover of funds from TLTRO-1 to TLTRO-2 in June last year.
“Demand for this operation was always going to be higher than the prior TLTRO-2s as it is the final opportunity to secure cheap liquidity over four years,” said Alan McQuaid, an economist at Merrion Capital in Dublin, said before the allotment. “Increasing concerns that the ECB will lift interest rates sooner than originally thought is likely to provide an added boost to demand.”
‘More Effective’
The amount banks can borrow in TLTROs is linked to the size of their loan books, in an attempt to spur lending to companies and households. According to 70 percent of respondents in the Bloomberg survey, that strategy has been successful.
While the euro area has posted 15 quarters of economic growth and seen inflation climb to 2 percent, officials are wary of declaring victory. The growth in consumer prices is largely driven by energy, with core inflation subdued and hard data such as industrial production volatile. Executive Board member Peter Praet, the ECB’s chief economist, said last week that the outlook doesn’t warrant talk of “regime change.”
Visco Sees Shorter Break Between QE Exit, Rate Hike
Even so, a debate is brewing over how and when stimulus can be withdrawn. Some policy makers raised the issue of sequencing at the March 9 Governing Council meeting, signaling nascent pressure to begin an official discussion on normalization sooner rather than later. Governors including Austria’s Ewald Nowotny and Italy’s Ignazio Visco have stated publicly that the current forward guidance could be reviewed.
Rate Probability
Investors have taken notice and are now pricing in a more than 50 percent probability of an increase in the deposit rate -- currently at minus 0.4 percent -- by December. A month ago, the chance was just 11 percent.
That’s a mixed blessing for the ECB. While it’s a sign of confidence, speculation over a rate increase pushes up market borrowing costs and so threatens to weigh on the economy. At a time when the euro-area faces political risks from elections, British plans to leave the European Union, and the U.S. administration’s disdain for global trade rules, that’s an unwelcome complication.
Yet banks, which have seen their profitability squeezed by negative rates, could welcome a tightening that gives them room to boost their loan rates, and that adds to the incentive to lock in the cheap four-year funding offered by the TLTRO now.
“It turns out the ECB hasn’t properly thought through its exit strategy from stimulus yet, despite what was implied in its guidance,” said Richard Barwell, an economist at BNP Paribas Investment Partners in London. “In a situation where markets think rates might rise sooner, TLTROs are a license to print money for the banks.”
To contact the reporters on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net, Andre Tartar in New York at atartar@bloomberg.net.
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow