ECB’s Negative-Rate Tweak Shifts Cash From Germany to Italy

(Bloomberg) --

Italian banks are making the most of the European Central Bank’s new tiered system for negative interest rates, luring in extra deposits as cash flows out of the euro-area core.

Lenders in Italy expanded their deposits at the central bank by 37 billion euros ($41 billion) to 137.8 billion euros, Bank of Italy data show. At the same time, separate central bank data showed a record drop in Italy’s liabilities toward the rest of the euro area, and an even larger decline in Germany’s net claims.

For five years, the ECB has sought to stimulate growth and inflation by charging banks to deposit funds with the central bank overnight. When the central bank in September went even further below zero, it sought to offset the harm to bank earnings by exempting a portion of the deposits from the negative rate.

The threshold was set at six times a bank’s minimum required reserve. Lenders -- like those in Italy -- that don’t exceed the threshold can take in money from foreign entities and deposit the money at the ECB at zero cost, avoiding the charge others that deposit-heavy banks such as those in Germany need to pay.

‘Considerable Redistribution’

“On the first day of operation of the two-tier system we observed a considerable redistribution of excess liquidity,” Benoit Coeure, an ECB executive board member, said on Tuesday in Frankfurt. “Often away from liquidity-flush countries such as Belgium, Germany and the Netherlands and towards countries with unused allowances, such as Italy.”

Italian lenders’ net liabilities toward the rest of the euro-area countries fell by a record 48 billion euros in October from a month earlier, under the ECB’s Target2 payment system, the Bank of Italy data show. Germany’s net claims fell by a 8.5% in October indicating that more euro area investors are moving deposits out of Germany in favor of other countries.

“For Italian banks, including UniCredit SpA, Banco BPM SpA and BPER SpA, that don’t reach the tiering threshold, this is a such convenient arbitrage that it’s a must do,” said Fabrizio Bernardi, an analyst at Fidentiis Equities.

Italian banks were among the biggest gainers on the FTSE MIB Index Tuesday, with UniCredit adding more than 2%.

Although the rise in Italy’s central bank deposits may be due to several factors “the timing of the increase suggests that it was mainly related to the introduction of the ECB’s new two-tier system,” a Bank of Italy spokesman said by email.

A risk for the ECB is that the deposit flows ease the downward pressure on short-term market rates. The central bank says that if it sees signs that tiering is influencing those rates, potentially undermining its monetary stimulus, it can change the level of exemptions.

--With assistance from Piotr Skolimowski, Lorcan Roche Kelly and Paul Gordon.

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Giovanni Salzano in Rome at gsalzano@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, ;Paul Dobson at pdobson2@bloomberg.net, Ross Larsen

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