Santander Corporate & Investment | Although the new deposit rate that is applied to bank liquidity in the ECB has increased 10 bp to -0.5%, the new tiering system will compensate for this increase and allow the European banks to reduce the interest from the previous -0.4% to -0.27%, as some 750 Bn€ remains exempt of payment (considering that part of the total of 788 Bn€ which supposes 6X the current reserve requirement of 131 Bn€ exceeds the excess of reserves of countries like Italy).
Therefore the banks will go from paying 0.4% for 1.77 Trn€ (including the deposit facility) to 0.5% for 1 Trn€. In percentage terms, 46% of the liquidity which European banks maintain deposited in the ECB will be exempt from paying the depo rate, compared to the 7% before (reserve requirement). By countries, periphery banks will benefit most, as practically all their excess reserves will stop paying the depo rate as the percentage of liquidity deposited in the ECB (including the deposit facility) exempt from payment rises to almost 93% in the case of Spanish banks and 91% for Italian banks, compared to 41% of the liquidity of German banks and 35% for the French.
The new terms of the TLTRO-III will also benefit periphery banks more. We expect that the new more generous conditions of TLTRO-III (maturity at 3 years and rates up to the current -0.5%) will motivate the banks to take part in these auctions (the results of the first will be published on Thursday), increasing also the repayment of the TRTRO-II loans from the next window in December. In this sense, given that more than half of the current balance of TLTRO-II of 693 Bn€ is in hands of Italian banks (238 Bn€) and Spanish banks (149 Bn€), we think that these new conditions of the TLTRO-III could favour these countries more. In addition, the banks which have lower excess reserves than their exemption limit (of 6 times the reserve requirement) could seek to borrow the remainder from the ECB at -0.5% and deposit it at 0%.