ECB’s tiered rate is cold comfort for euro zone banks
FRANKFURT (Reuters) – The European Central Bank is offering euro zone banks a small reprieve from a penalty charge on their idle money but this is most likely to show too little, far too late for a sector hurt by years of low rate of interest.
In its most current quote to protect the euro zone’s economy from a worldwide economic slowdown, the ECB pressed its deposit rate further below zero on Thursday – efficiently increasing how much it charges banks for keeping their excess money over night.
It belonged to a plan that also consisted of a pledge to buy properties and keep rates low and even cut them until inflation go back to the ECB’s target of simply under 2 percent.
To cushion the current blow to an already ailing industry, the ECB introduced a so-called tiered system of interest rates whereby a part of bank deposits, presently set at six times their necessary reserves, is excused from the charge.
However the size and style of the scheme, inspired by one utilized by the Swiss National Bank, left observers underwhelmed.
For starters, the exemption would lead to an annual saving of only 3.1 billion euros for the whole euro zone banking system, or a simply over a third of what the cost would have been without it, according to Pictet estimates.
And this calculation may overstate the real benefit of the tiered rate as excess liquidity is primarily focused at bigger banks in richer nations such as Germany and France, meaning the scheme won’t be made use of to its optimum.
” Even if the tiered interest rate presented today offers 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, stated.
Second, the blanket exemption for all banks could even trigger a rise in loaning expenses for some banks in nations, such as Italy, offered that the wholesale funding market is still mostly divided along nationwide lines.
This indicated that larger peripheral banks that currently provide their excess money to their domestic rivals at negative rates could now select to park it at the ECB for complimentary, denying weaker banks of a crucial source of funding.
On the advantage, banks that are positive of satisfying the ECB’s loaning targets can be paid 0.5%to borrow cash at the central bank’s multi-year auctions and after that simply position it in their account at the tiered rate.
The ECB scheduled the right to change the exemption limit and the rates charged listed below and above it “such that euro short-term cash market rates are not unduly affected”.
But even so the benefits of the tiered rate were most likely exceeded by the pledge to keep the cash taps open forever, which was already dismaying market rate of interest for several years to come.
” What is clear is that the ECB is not driven by bank profitability issues,” Marco Troiano, a director at Scope Rankings, said. “The open ended assistance will even more flatten the curve, which eliminates bank profitability.”
Reporting By Francesco Canepa; Modifying by Chizu Nomiyama