The European Central Bank’s latest offer of free cash to lenders attracted little interest yesterday, in a sign of just how much liquidity is already sloshing around the financial system.
An offer for three-year loans – at a rate that starts at zero and could fall as low as the deposit rate, currently minus 0.5% – was taken up by 28 banks for a total of just €3.4bn ($3.8bn), well below predictions of €20bn-€100bn.
The loans are part of a stimulus package by the ECB president to boost economic growth and inflation. But European lenders have little trouble accessing funds following years of loose monetary policy and some are even keen to turn away deposits to avoid charges from the ECB’s negative interest rates, which Draghi pushed even further below zero this month.
His package prompted unprecedented opposition inside the ECB, with the euro region’s biggest economies criticising a plan to resume bond purchases. Negative rates have also been contentious, with top finance executives warning of damage to the financial system in the long run. Banks have said they want to see higher rates to increase the profitability of their lending businesses, but that’s a distant prospect given Europe’s ailing economy.
Spain’s Banco Bilbao Vizcaya Argentaria SA didn’t take part in this month’s offering, but is considering doing so in future rounds, according to the company’s press department. Other European banks took a similar stance when contacted by Bloomberg.
While Italian banks have been the biggest takers of the ECB funds in previous programs, the country’s largest firms weren’t lured this time around. Intesa Sanpaolo SpA chairman Gian Maria Gros-Pietro said earlier this month that his firm doesn’t need the money. UniCredit SpA chief executive officer Jean Pierre Mustier has said that the bank’s funding plan doesn’t reflect participation in the ECB’s offering.
Banks may have refrained because of changes the ECB made to the terms of the loans last week, according to Piet Christiansen, a senior analyst at Danske Bank, who expects a larger take-up in later operations.
The ECB made the interest on the loans more attractive, but that left banks little time to change their plans. Banks could also be waiting for another key piece of the latest policy move to kick in: the partial exemption from negative rates for banks that hold deposits at the central bank. That starts next month and banks may want to minimise their excess funds in the interim.
Yesterday’s offering of three-year loans was part of the third series of so-called targeted longer-term refinancing operations, under which the cost of the loans falls if banks lend more to companies and households. In total, seven operations are planned, with the last offer in March 2021. The aim is largely to stimulate investment and spending to battle a slowdown caused by the US-China trade war and the risk that the UK is headed for a no-deal Brexit.
The ECB’s efforts come amid a wave of fresh monetary support globally. The Federal Reserve on Wednesday cut its key rate for the second time this year, with chairman Jerome Powell saying weakness in global growth and trade policy have weighed on the economy. The Bank of Japan left policy unchanged yesterday while saying it’ll undertake a closer review next month.
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