ECB brain­storms as Draghi seeks boost sans hurt­ing banks

The Pak Banker - - FRONT PAGE -

One week be­fore a long-awaited stim­u­lus de­ci­sion, Euro­pean Cen­tral Bank of­fi­cials are pri­vately de­lib­er­at­ing over how to en­hance their mon­e­tary pol­icy stance with­out maim­ing its trans­mis­sion.

Com­mit­tees study­ing how to mit­i­gate the im­pact on banks have pre­pared po­ten­tial mea­sures that range from vari­a­tions on a tiered de­posit rate to tech­niques for coun­ter­ing the im­pact of stim­u­lus on ex­cess liq­uid­ity, ac­cord­ing to peo­ple fa­mil­iar with the dis­cus­sions. The sug­ges­tions could still be re­jected by the Ex­ec­u­tive Board or turned down at the Govern­ing Coun­cil's March 10 meet­ing. An ECB spokesman de­clined to com­ment.

With euro-area in­fla­tion once again be­low zero and con­cerns mount­ing over the state of the global econ­omy, ECB Pres­i­dent Mario Draghi and his col­leagues are con­sid­er­ing whether mon­e­tary pol­icy needs to give more im­pe­tus to the cur­rency bloc's re­cov­ery. The chief con­cern is that neg­a­tive in­ter­est rates, es­pe­cially if cut fur­ther, might squeeze banks' prof­itabil­ity to the ex­tent they pull back on lend­ing to com­pa­nies and house­holds.

Draghi "should worry about the im­pli­ca­tions for the bank­ing sys­tem," Mark Burgess, chief in­vest­ment of­fi­cer for EMEA at Columbia Thread­nee­dle In­vest­ments, said in an in­ter­view in Frank­furt on Wed­nes­day. "He needs a healthy bank­ing sec­tor." One of the most straight­for­ward mea­sures would be to cut the de­posit rate from the cur­rent mi­nus 0.3 per­cent, while im­ple­ment­ing a two-tier sys­tem. Banks would pay the neg­a­tive rate only on the por­tion of their funds parked at the ECB that ex­ceeds a cer­tain thresh­old.

Such a fa­cil­ity, sim­i­lar to that used at other cen­tral banks with neg­a­tive rates in­clud­ing the Swiss Na­tional Bank, would be sim­ple to im­ple­ment in the euro area, the peo­ple said, ask­ing not to be iden­ti­fied as the dis­cus­sions are pri­vate.

An ex­ec­u­tive at a ma­jor euro-area bank, who also asked not to be iden­ti­fied, said he doesn't know whether lenders could han­dle a tiered de­posit rate im­me­di­ately. It would largely de­pend on the de­sign, he said.

While the Frank­furt-based ECB has op­er­ated a de­posit rate be­low zero since mid-2014, it so far hasn't taken any di­rect steps to off­set the po­ten­tial hit to bank prof­itabil­ity. A re­duc­tion in the rate of at least 10 ba­sis points is fully priced in by in­vestors, data com­piled by Bloomberg in­di­cate, based on swaps on the euro overnight in­dex av­er­age. The prob­lem for fi­nan­cial in­sti­tu­tions is that they can't eas­ily pass the cost of hold­ing overnight cash at the cen­tral bank onto their cus­tomers for fear that they'll with­draw their sav­ings. Bank stocks have sold off this year, partly on con­cern that more neg­a­tive rates are on the way.

That's some­thing for the ECB to con­sider as of­fi­cials head into a self­im­posed quiet pe­riod that starts Thurs­day. "We are well aware of this is­sue," Ex­ec­u­tive Board mem­ber Benoit Coeure said on Wed­nes­day. "We are mon­i­tor­ing it on a reg­u­lar ba­sis and we are study­ing care­fully the schemes used in other ju­ris­dic­tions to mit­i­gate pos­si­ble ad­verse con­se­quences for the bank lend­ing chan­nel."

Another tech­ni­cally straight­for­ward op­tion for the ECB would be to in­crease its monthly bond pur­chases un­der QE. The cen­tral bank cur­rently pledges to spend 60 bil­lion eu­ros ($65 bil­lion) a month on pub­lic and pri­vate debt through at least March 2017, a to­tal of at least 1.5 tril­lion eu­ros.

Yet that pro­gram, along with tar­geted long-term loans to banks known as TLTROs, is gen­er­at­ing large amounts of cash that have to be parked some­where. Ex­cess liq­uid­ity in the euro area has risen to more than 700 bil­lion eu­ros from less than 150 bil­lion eu­ros a year ago when quan­ti­ta­tive eas­ing started. Un­der the neg­a­tive de­posit rate, those ex­cess funds be­come a cost bur­den for banks. The ECB is con­sid­er­ing var­i­ous op­tions to make sure banks aren't pe­nal­ized for the ex­tra liq­uid­ity and slow lend­ing, one of the peo­ple said.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.