The Banks Sweep On The ECB Ahead Of Expected Rate Hikes

ECB's rates hikesECB's headquarters

The certainty that we are on the threshold of a phase of consistent interest rate rises – the Fed could implement two or three further hikes this year – is spurring the European banks to endow themselves with liquidity from the ECB, at low prices. So much so that the demand for those ECB LTROs, long-term loans (four years) at 0% granted to the banks to boost lending, consumption and therefore the economy, soared in February.

In the last auction, the ECB awarded a total of 233.5 billion euros in long-term loans (LTROs) to almost 500 European banks. This is four times the amount of the December auction, when the total was 62.161 billion euros, or over five times more than the 45.270 billion euros awarded in September.

According to the experts, it’s not that the lenders are in great need of liquidity at the moment – their levels of credit are still weak – but it’s better to be on the safe side and given that the LTROs are at 0%, why not? Furthermore, these loans have an incentive already incorporated. If the borrower banks increase lending by 2.5%, they get a bonus of 0.4% on the money they’ve lended.

Contrary to what we might have thought, the Spanish lenders have not been the most active in asking for these loans. Out of the 474 banks who requested loans, there were only a few Spanish banks involved in this auction. And only two made significant requests for credit. Sabadell for 10.5 billion euros and Popular for 7.2 billion. CaixaBank, BBVA and Bankia didn’t even bother to participate.

In fact, Spanish banks’ debt with the ECB is rising very slowly, even below European levels. In January, it only rose 3.37% to 144.583 billion euros from December, and was up 8.74% year-on-year.

On the other hand, the Eurozone banks’ gross demand rose 4.74% to 589.898 billion euros in January from December and 9.3% from a year earlier. But we mustn’t forget that Spanish banks debt with the ECB now represents 24.5% of the total banks in the Eurosystem. So much higher than its relative weighting in the European economy.

What is true is that if the ECB had hardly moved a muscle to relaunch a depressed European economy before the arrival of Mario Draghi, the central bank now seems to be set on mobilising all its resources to boost the economy and definitively push inflation up towards the 2% threshold.

Despite the fact the LTROs were close to being terminated, Draghi plans to continue using them at least until the end of the year. In part because the ECB is still fairly worried about the health of the European banks, doubting that they are in an ideal condition to play the role expected of them – reactivating lending – in the European economy’s recovery.

“The ability of the banking sector to fully support the recovery in the euro area is being weakened by the lenders’ low profitability levels, to which an excess of capacity, inefficiencies and their inherited assets all contribute,” says the ECB.

One problem, for example, is that the European banks’ NPLs total 920 billion euros, approximately 6.5% of the loans in issue. This default rate is even higher in Spain, where the 111.766 billion euros of doubtful loans account for 9.17% of the total, 41% more than the eurozone average.

These figures are a drag on the banks and, added to the requirements on capital ratios, undermine the lenders’ capacity to lend. This explains why the LTROs are going to remain for the time being.

About the Author

Fernando Barciela
Fernando Barciela has been a regular collaborator for Spain's leading daily El Pais' business section since 1994. He is also a regular collaborator on foreign policy. For Grupo Consejeros he interviews the top executives of Spain's listed companies. He was a correspondent with Diario de Noticias, Portugal's leading daily newspaper, in 1987-2004. He has a degree in Business Science and Journalism from the Complutense University.