HSBC Says Tiering ECB Reserves Not Right Answer to Help Banks

(Bloomberg) -- Exempting some bank reserves from the European Central Bank’s negative interest rates may not provide relief to those financial institutions needing it most, according to HSBC.

Since liquidity isn’t evenly distributed across the region, a so-called two-tier system would mostly benefit banks with plenty of reserves in the core of the euro area and “not the struggling ones in the periphery,” economists including Fabio Balboni wrote in a note on Thursday. A blanket increase in reserve requirements isn’t an attractive option either because it may force some banks to deleverage.

Speculation increased in the run up to last week’s Governing Council meeting that the ECB may consider a deposit-rate tiering or even raise the rate in a one-off move to help ease a squeeze on bank profitability. When asked about it on Thursday, President Mario Draghi told reporters negative interest rates are still an effective monetary-policy measure.

The ECB became the first major central bank to cut rates below zero in 2014. The deposit rate is currently at minus 0.4 percent and two policy makers -- Francois Villeroy de Galhau and Benoit Coeure -- said on Friday they didn’t know if an increase later this year was still possible amid a darkening economic outlook.

HSBC argues the ECB would be better advised to “ensure that funds got where they are needed” by offering another round of targeted longer-term loans to banks -- a decision they expect to be announced in March. Draghi said last week the ECB would need a monetary-policy case for such a move.

“TLTROs can be seen as a means of facilitating the pass-through of the negative deposit rate into the real economy, reducing the risk of the monetary-transmission channel breaking up,” according to HSBC.

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