ECB brainstorms as Draghi seeks boost sans hurting banks
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.