BofAML | A new Asset Purchase Programme may need new asset classes and the EUR460bn bank bond market fits that bill. We see bank bond buying as immensely complex and involving elevated levels of moral hazard. A market already featuring negative yields and Greek Tier 2 issuance does not need ECB intervention to function
Negative rates are the big deal for banks
We have discussed extensively the corrosive impact of negative rates on banks. All we would add here is that more-negative rates are likely in our view to have an increased negative effect, as the distance below the zero that banks pay on deposits and wholesale market rates further undermines deposit franchises. The same level of negative rates run for longer has an increasingly greater impact, as the benefits on hedges expire and as non-performing loans are exited.
We consider one potential area of asset purchase expansion: bank debt. Should the ECB wish to impress the market with a very large pool of assets it may be able to acquire in a future asset purchase programme, bank debt could be a useful increment.
We are not of the view that there is anything intrinsically impactful about buying bank debt at this stage. It may have been the case at the peak of the suffering crisis, but now bank debt trades close to that of similarly rated corporates.
In the aftermath of the ECB Meeting last Thursday, we did see press reports from e.g. Bloomberg and elsewhere that the Governors of the ECB had doubts about purchasing more corporate bonds and were against purchasing stocks and bank bonds. Yet equally all options for the ECB are supposed to be on the table now and various committees have been tasked with examining all of them. It seems unlikely to us that this topic will disappear from view in the near term.