Our new Cryptocurrency section has arrived! Click here

Less Ads, More Data, More Tools Register for FREE

ECB's tiered rate is cold comfort for euro zone banks

Thu, 12th Sep 2019 17:03

* Design and size of the scheme disappoint

* Discount will only save banks up to 3.1 bln euro

* Peripheral banks may see wholesale funding dry up

* Pledge to keep rates low to hurt banks for years

By Francesco Canepa

FRANKFURT, Sept 12 (Reuters) - The European Central Bank is giving euro zone banks a small reprieve from a penalty charge on their idle cash but this is likely to prove too little, too late for a sector hurt by years of low interest rates.

In its latest bid to shield the euro zone's economy from a global economic slowdown, the ECB pushed its deposit rate further below zero on Thursday - effectively increasing how much it charges banks for keeping their excess cash overnight.

It was part of a package that also included a pledge to buy assets and keep rates low or even cut them until inflation returns to the ECB's target of just under 2 percent.

To cushion the latest blow to an already ailing industry, the ECB introduced a so-called tiered system of interest rates whereby a portion of bank deposits, currently set at six times their mandatory reserves, is exempted from the charge.

But the size and design of the scheme, inspired by one used by the Swiss National Bank, left observers underwhelmed.

For starters, the exemption would result in an annual saving of only 3.1 billion euros for the entire euro zone banking system, or a just over a third of what the cost would have been without it, according to Pictet estimates.

And this calculation may overstate the actual benefit of the tiered rate as excess liquidity is mostly concentrated at larger banks in richer countries such as Germany and France, meaning the scheme won't be exploited to its maximum.

"Even if the tiered interest rate introduced today provides some relief, European banks will continue to have to pay billions to the ECB every year as some sort of penalty charge tax," Hans-Walter Peters, president of the German banking association, said.

Second, the blanket exemption for all banks could even cause a rise in borrowing costs for some banks in countries, such as Italy, given that the wholesale funding market is still largely divided along national lines.

This meant that larger peripheral banks that currently lend their excess cash to their domestic rivals at negative rates could now choose to park it at the ECB for free, depriving weaker banks of a key source of financing.

On the upside, banks that are confident of meeting the ECB's lending targets can be paid 0.5% to borrow cash at the central bank's multi-year auctions and then simply place it in their account at the tiered rate.

The ECB reserved the right to change the exemption threshold and the rates charged below and above it "such that euro short-term money market rates are not unduly influenced".

But even so the benefits of the tiered rate were likely outweighed by the pledge to keep the money taps open indefinitely, which was already depressing market interest rates for years to come.

"What is clear is that the ECB is not driven by bank profitability concerns," Marco Troiano, a director at Scope Ratings, said. "The open ended guidance will further flatten the curve, which kills bank profitability." (Reporting By Francesco Canepa Editing by Chizu Nomiyama)

More News

Philly Fed index improves in November, but survey details weak

(Sharecast News) - Manufacturing sentiment in the US mid-Atlantic region improved moderately in November, the results of a closely-followed survey revealed.

Today 14:12

Initial weekly US jobless claims continue to edge higher

(Sharecast News) - A key indicator of the strength of the US jobs market failed to improve as expected over the preceding week.

Today 14:02

Northern Irish man challenges extradition over UK truck deaths

DUBLIN, Nov 21 (Reuters) - One of the two Northern Irish men charged with manslaughter over the deaths of 39 Vietnamese people found in the back of a truck near London last month challenged attempts to extradite him to Britain in an Irish court o...

Today 13:50

Atalaya Mining Delivers Higher Profit Despite Falling Output, Revenue

Atalaya Mining Delivers Higher Profit Despite Falling Output, Revenue

Today 13:49

Login to your account

Don't have an account? Click here to register.