ECB’s Latest Stimulus Will Help Banks More Than the Economy
Investors were too negative about the recent European Central Bank announcement, which was good news for lenders
By Jon Sindreu
After months of pretending to ignore the subject, the European Central Bank has finally confirmed another bout of long-term lending. This won’t revive the slowing eurozone economy, but it will help cushion the blow for banks.
On Thursday, the ECB announced a third round of its Targeted Longer-Term Refinancing Operations—or TLTRO—program, which will offer cheap two-year loans to eurozone banks, linked to lending to businesses and households. This makes the Frankfurt-based central bank the first in the developed world to ease policy again, following clear signs of a global economic slowdown.
However, investors shouldn’t expect a fresh wave of credit to help the eurozone economy.
When it comes to liquidity, central banks can bring the horse to water but not make it drink. After the 2008 financial crisis, the ECB pumped about €3 trillion ($3.4 trillion) into banks’ books, but lending didn’t jump—nor did it in other countries whose central banks did the same.
ECB President Mario Draghi at his regular news conference in Frankfurt on Thursday. Photo: Jasper Juinen/Bloomberg News
Banks’ lending decisions are mostly made on the basis of how creditworthy their borrowers are, not the availability of funds. Banks have the ability to create deposits when they lend, and they can always tap the interbank short-term funding market, which the central bank is ultimately backing with a range of other operations.
This is why TLTRO operations were never in huge demand. The most successful round was the last—because banks thought there would be no more—and it amounted to just €234 billion.
The program’s main benefit is that it allows banks to circumvent banking regulations that authorities themselves impose. The loans are less long-term than they appear, because banks are forced to repay them if their collateral turns bad, but they do count as long-term for the purposes of rules that penalize short-term borrowing.
The round therefore amounts to a small but welcome subsidy for European banks, which have had a dreadful run on the stock market.
“If there were no subsidies nobody would take up the TLTROs,” ECB President Mario Draghi said Thursday.
The TLTRO may end up being yet another case of a central bank giving with one hand what it takes with the other: Officials also signaled that interest rates will remain at record lows for longer than previously thought, which is bad for lenders. Eurozone bank stocks dropped about 4% Thursday.
However, this could be an overreaction. Investors already knew that rates wouldn’t go up this year because the eurozone economy is slowing. Thursday’s announcement is still good for banks: No matter what happens, the ECB just threw them a bone.
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