Banks return to the ECB much less than expected by the markets


Eurozone banks will return almost 300,000 million euros in advance to the European Central Bank (ECB), after the entity worsened the conditions of this liquidity. The amount has fallen much more than expected by the markets, some 600,000 million euros on average, but it has been within the expectations of the ECB, which understands that banks need more time to assess the new situation and anticipates that they will return more money in December.

Analysts from the Italian banking company UniCredit even calculate a trillion euros this year. For its part, the ECB, which began raising its interest rates in July, wants the banks to pay back the very cheap loans and for this it has worsened the conditions of operations.

From September 2019 to December 2021, the ECB lent banks money three years at very low interest rates, even negative, so that they quickly lend to companies and households and thus boost economic growth, especially during the pandemic. In fact, the entity improved the conditions in the pandemic for banks to maintain credit in circumstances in which they do not give loans.

remain to return nine of the ten operations of the third round of these three-year refinancing operations. They are currently pending payment. 2.1 trillion euros of these operationsan amount that represents less than half of an excess liquidity of 4.7 trillion euros.

With the initial and pandemic conditions, these operations are very expensive for the ECB and national central banks after interest rate hikes. Loan interest is paid at maturity of the operation. In the event that a bank repays the loans early, pay the interest at that time.

From the end of June 2020 to the end of June 2022, banks were able to receive liquidity from the ECB at -1%, as the ECB deposit rate was then at -0.5%, the ECB rewarded banks with a 0.5% if they granted many loans, excluding mortgages.

If they didn’t give many loans, they could get liquidity at the deposit rate (then -0.50%), so that the ECB compensated what it charged them for excess reserves, for parking the money in the entity. Now that the ECB raises interest and the deposit rate is no longer negative, the interest rate banks pay for liquidity is much lower than what they receive from depositing excess reserves with the ECB, and they can make money by borrowing from the entity.

Change of conditions

The ECB decided adjust the interest rates of these operations. From November 23, 2022 until the maturity or early repayment date, the applicable interest rate will be indexed to the average of the deposit rate, if the banks lend enough, or to the interest rate of the main refinancing operations, which is higher, if they do not give enough credits.

From June 2022 to November of the same year, the interest rate that banks must pay is the average of the deposit rate from the start of the operation to November 22. The deposit rate stopped being negative in July after the ECB raised interest rates by 50 basis points, in September it already increased to 0.75% and now it is already at 1.50% and will rise further. With these new conditions, the ECB expects the banks to repay the loans.

three-year liquidity

Three-year refinancing operations began in September 2019 and were offered again by the ECB in 2020 to respond to the pandemic crisis. In the June 2020 operation, which was the fourth of these ten operations, the ECB awarded the record of 1.308 trillion euros to 742 banks because demand for liquidity skyrocketed after conditions improved.

Some banks parked liquidity, others carried out “carry trades” and others bought sovereign debt from their countries. Bank J. Safra Sarasin Sustainable AM ​​chief economist Karsten Junius calculated that, under the above conditions, the difference between the rates banks paid for three-year liquidity and what they received for depositing those funds in the ECB deposit would have cost the Eurosystem 29,000 million euros in 2023. On the other hand, the ECB considers that changing the conditions of operations is a more effective measure than reducing the remuneration of excess reserves.


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