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Banks return less money to the ECB than the market expects

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Eurozone banks will bounce back About 300,000 million euros in advance to the European Central Bank (ECB), after the entity worsened these liquidity conditions. The amount is much lower than market expectations, an average of around 600,000 million euros, but it is in line with the expectations of the ECB, which understands that banks will need more time to assess the new situation and expects them to return more money. In December.

Analysts at the Italian banking giant UniCredit also count one trillion euros this year. For its part, the ECB, which began raising its interest rates in July, wants banks to Pay off the loan very cheaply And for this the conditions of operation have deteriorated.

From September 2019 to December 2021, the ECB paid banks Three years at very low interest rates, Even negative, so that they quickly lend to companies and households and thus stimulate economic growth, especially during a pandemic. In fact, the pandemic improved conditions for banks to maintain credit in situations where institutions would not lend.

is yet to be returned Nine out of ten third round operations Of these three-year refinancing operations. They are currently pending payment. 2.1 trillion euros of these operationsAn amount representing less than half of the excess liquidity of 4.7 trillion euros.

These operations are very expensive for the ECB and national central banks after interest rate hikes, including initial and epidemic conditions. Loan interest is paid on maturity of the operation. If the bank repays the loan early, Pay interest at that time.

From the end of June 2020 to the end of June 2022, banks were able to get liquidity from the ECB at -1%, as the ECB deposit rate was then -0.5%, the ECB rewarded banks if they granted 0.5%. Many loans, excluding mortgages.

If they don’t owe much, they can Get liquidity at deposit rate (after -0.50%), so that the ECB reimburses them for the extra reserves they charge, for parking money at the institution. Now that the ECB is raising interest rates and the deposit rate is no longer negative, the interest rate banks pay for liquidity is much lower than the interest rate they would receive from holding excess reserves with the ECB, and they can earn money by borrowing from the institution.

A change in circumstances

The decision was taken by the ECB Adjust the interest rates of these operations. From November 23, 2022 until the maturity or early repayment date, the applicable interest rate will be indexed to the average of the deposit rate, if banks provide sufficient credit, or to the interest rate of principal refinancing operations, if higher, if they do not provide sufficient credit.

From June 2022 to November of the same year, the interest rate to be paid by banks is the average of the deposit rate from the date of commencement of operations till November 22. Deposit rates stopped going negative in July After the ECB raised interest rates by 50 basis points, it already rose to 0.75% in September and is now already at 1.50% and will rise further. With these new conditions, the ECB expects banks to repay loans.

Three years liquidity

The three-year refinancing operation started in September 2019 and was offered again by the ECB in 2020 to respond to the pandemic crisis. In the June 2020 operation, which was the fourth of these ten operations, The ECB awarded a record 1.308 trillion euros Demand for liquidity skyrocketed after conditions improved at 742 banks.

Some banks held liquidity, others did “carry trades,” and others bought sovereign debt from their countries. Bank J. Carsten Junius, chief economist at Safra Sarasin Sustainable AM, calculated that under the above scenario, the difference between the rates banks pay for three-year liquidity and the rates they receive for depositing those funds into ECB deposits would cost the Eurosystem. 29,000 million euros in 2023. On the other hand, the ECB believes that changing the conditions of operations is a more effective solution than reducing the payment of excess reserves.

Source: lainformacion.com

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