FRANKFURT (Reuters) – The European Central Bank is studying ways to cut subsidies to banks that could cost it tens of billions of euros in interest, four sources told Reuters, a move that could cause backlash be opposed to.
To combat runaway inflation, the European Central Bank has raised the interest rate it pays on bank reserves in excess of the required 4.6 trillion euros ($4.5 trillion) from -0.5% to zero. 75% in less than two months.
This leaves the ECB in the throes of tens of billions of euros in annual interest on these reserves and risks burning a hole in the central bank capital of the countries where most of the reserves are, the Netherlands and Belgium have warned of imminent suffer losses. When the public is struggling with high inflation.
Banks in particular can earn guaranteed profits on three-year loans they have taken out of the ECB itself, as they pay on average less interest for these targeted long-term refinancing operations (TLTROs) than they would for the same cash The interest earned by depositing in the central bank.
For these reasons, ECB staff are looking at ways to reduce payments, such as not paying interest on any cash the bank borrows from the central bank itself, sources close to the matter told Reuters.
The ECB could also change the terms of the TLTRO loan, the sources added, although this could damage the credibility of future plans and spark legal challenges.
Other proposals include only paying interest on excess reserves below or above a threshold or removing minimum reserves – banks must remain at the ECB and currently yield 1 per annum, sources said .25% of reserves.
An ECB spokesman declined to comment.
Any such move could displease the banks and could even bring the ECB to court.
But ECB policymakers see reason to act if action is needed to protect capital, the sources said, noting that lenders have benefited from ultra-cheap loans in the past.
The topic was only briefly discussed by policymakers at the September 8 meeting and is expected to be revisited at a retreat on October 5 in Cyprus or at the October policy meeting 23 – When the ECB is ready to raise rates again.
The Swiss National Bank said on Thursday it would only pay interest on reserves that “reach a certain threshold”, while French central bank governor François Villeroy de Galhau Support similar programs.
One problem for the ECB is the different options
For example, Italian banks borrow more from the ECB than they hold excess reserves with the ECB, while The opposite is true in most countries.
Dutch bank ING will see “disruptive effects on Italian money markets” if the ECB stops repaying some of the funds Italian banks borrowed under TLTRO.
Another problem is that the ECB must justify any decision based on monetary policy, not to protect its own profits or avoid political embarrassment.
“The more relevant issue here, than our income statement, is the financial soundness of the central bank’s balance sheet through its level of capitalized reserves,” Villeroy de Galhau of Banque de France in said in a recent speech.
“We have to think about a reserve compensation system that adapts to this new environment.”