The ECB seeks to limit the benefits 'fallen from heaven' for banks due to the rate hike, according to 'FT'

MADRID, 4 Jul. (EUROPA PRESS) -

The European Central Bank (ECB) is studying ways to limit, once interest rates begin to rise at the end of July, the billions in extraordinary profits for banks derived from the 'ultra-cheap' loan program launched by the institution, according to the 'Financial Times' newspaper.

Although the around 2.2 trillion euros in subsidized loans provided to banks by the ECB during the pandemic helped avoid a credit crisis, now that the central bank is preparing to raise interest rates, entities could obtain additional profits of up to 24,000 million through these, according to analysts.

The ECB announced last June that it intends to raise its three reference interest rates (deposit, loan and refinancing) by 25 basis points at its meeting on July 21, while it indicated that it will undertake an even higher rise in September, which could return the deposit rate to positive territory for the first time in more than a decade, since it has been negative since 2014 and since 2012 it was zero.

In this way, according to knowledgeable sources, the Governing Council of the ECB wants to discuss how it could reduce the additional margin that hundreds of banks will be able to obtain from these subsidized loans simply by depositing the money in the central bank, which would be politically unacceptable in a context in which which increases borrowing costs for households and businesses.

One option cited by the newspaper could be for the ECB to change the terms of the loans to reduce the possibility of banks making an automatic return of the money.

The ECB started in 2019 to offer loans through the specific long-term refinancing operations (TLTRO), available at the same level as the ECB deposit rate of -0.5%, which it later reduced to -1%, provided not reduce their loan portfolios.

Although the ECB returned the TLTRO rate to its -0.5% deposit rate last month, the lending rate is calculated as an average over its three-year lifespan.

Also, banks can return the money in advance every three months. Early repayments of €74bn were made last month, far less than expected, reflecting the increased appeal of the plan as interest rates rise.

Morgan Stanley estimated that, depending on the intensity of the rate hike, banks could make between €4 billion and €24 billion of extra profit by depositing the ECB's cheap loans with the central bank until the end of the plan in December 2024, although a source briefed on the matter said the ECB estimated the total profit available to banks to be almost half of Morgan Stanley's maximum estimate.