The European Central Bank expects banks to flock to its new ultra-long loan offering in September, regardless of the weak economic outlook for the euro zone, primarily because they need to refinance an earlier round of such borrowing. Whether the new funds will actually reach companies and households as intended by the ECB is less clear.
Banks have until Thursday to submit lending reports to the ECB to determine how much they can borrow in September and December under the new four-year loan programme, called TLTROs, which aims to push banks to lend more to the real economy. But disappointing growth data and uncertainty over the economic implications of conflicts in Ukraine and Iraq have raised questions among analysts over the programme's ability to boost lending if loan demand remains subdued.
The cheap loans remain attractive for banks regardless. "We should remember that the (previous) three years (programme) will be maturing in February 2015," said Ulrich Bindseil, the ECB's director general of market operations, who oversees the implementation of the TLTROs. "The TLTROs will partially substitute other forms of central bank liquidity, like the expiring (loans), but also shorter term central bank operations and funding in the market," Bindseil told Reuters in remarks released on Tuesday.
"A number of large banks" had said they would take part. There are overall 362 billion euros($477 billion dollars) left from the ECB's last round of longer-term refinancing operation, launched during the bloc's debt crisis in late 2011 and early 2012 to help banks through a period of strained funding. The last of these loans expire in February 2015. Several banks used the cheap funds at the time to replace more expensive funding and make profits by buying up higher-yielding sovereign debt. This time, the ECB is trying to channel the funds to the real economy by letting banks to borrow up to the equivalent of 7 percent of their loan exposure to businesses and households.
And the banks only get to keep the loans for the full four-year term if they keep lending to consumers and companies. But the ECB cannot direct how the cheap money is spent and with the loans only costing the banks 0.25 percent many analysts believe lenders will again use the money to buy higher yielding bonds to boost their profits rather than lend more to companies.
"From a macro-perspective, I don't think there will be much of an impact on the overall volume and a very large impact will be on improving bank interest margins and ... profitability," said Adrian Docherty, head of bank advisory at BNP Paribas. "In many ways it would be an oversight to not take advantage of the subsidised funding that is being pushed into the system and therefore I would expect a large take-up."