It is time for decisions for the European Central Bank. Not only with regard to the remodeling of quantitative easing, but also with regard to the targeted longer-term refinancing operations, which have reached their third program (Tltro III). Although the soft loan program is expected to expire between September 2022 and December 2024, with around 55% of the € 2,200 billion of loans maturing in June 2023, the markets are focused on the end of June 2022, when the end of the special period with the interest rate at -100 basis points. Eurotower has not yet given any information on this.
Barclays analysts expect the ECB to extend the Tltro measures (in the form of new Tltro III auctions or a fourth program), but remove the extraordinary subsidy of 50 basis points, applied since June 2020, and return to a loan rate at -50 basis points.
The 50 basis point subsidy was an important measure for the continent’s institutions as it mitigated the decline in their profitability in a context of negative interest rates. To partially or completely compensate for its removal from next June, it is probable, explained by Barclays, that the ECB will adjust the tiering, or the current two-tier system for the remuneration of excess reserves on the accounts of national central banks, in force from 30 October 2019. Under this system, part of the excess reserves, calculated as a multiple of the minimum reserve requirement, and exempt from the negative interest rate on deposits with the central bank (today at -0.50%). The Governing Council has currently set the multiple of the compulsory reserve to be exempted at 6 and the interest rate to be applied to these specific funds at 0%. “Frankfurt will be able to communicate decisions on the Tltro as early as next December or more likely at the beginning of 2022 in order to give the banks time to organize themselves,” Barclays experts said. The tiering adjustment could instead be announced in April or June 2022 should the ECB want to mitigate the removal of the special rate immediately. Markets tend to associate Tltro loan repayments and tiering with higher short-term rates, so volatility on that part of the curve is likely to increase if they run into miscommunication in Frankfurt. The tiering adjustment could instead be announced in April or June 2022 should the ECB want to mitigate the removal of the special rate immediately. Markets tend to associate Tltro loan repayments and tiering with higher short-term rates, so volatility on that part of the curve is likely to increase if they run into miscommunication in Frankfurt. The tiering adjustment could instead be announced in April or June 2022 should the ECB want to mitigate the removal of the special rate immediately. Markets tend to associate Tltro loan repayments and tiering with higher short-term rates, so volatility on that part of the curve is likely to increase if they run into miscommunication in Frankfurt.
The analysts of the British bank have calculated that the so-called “tiering breakeven ratio”, that is the level that would guarantee European institutions (in reality only the main ones that are followed by Barclays) the same degree of accommodation as an extension of the special rate to -100 basis points for another year, without generating arbitrage opportunities, and equal to 26x. Of course, the Eurotower could also consider a partial adjustment of the multiple. Experts pointed out that the compensation effect at 26x would affect the banking sector, but in relative terms there would be winners and losers. In fact, at the regional level, the Italian and Spanish institutions that would see the least benefits from the removal of the 50 basis points subsidy are which have higher Tltro balances outstanding and therefore exhibit an above average breakeven multiplier at 36x and 29x respectively. The ratio is lower for French (21x), German (18x) and Swedish (16x) banks.
No alarmism, however. “Given that this position is consistent with current features within the Tltro and already integrated into our models, we should not expect an impact for European banks in terms of earnings per share revisions,” Barclays experts said. liquidity tightening will not be seen. “It is important to note that any increase in the multiple is likely to produce positive net results for all banks compared to the status quo. For example, on average, with a multiplier of 26x, the interest margin would increase on average by 4% for banks. banks we follow “. This positive impact on the interest margin would rise to 5% considering the evolution of excess liquidity in the interbank system with the asset purchases in Frankfurt expected by Barclays at least until the end of 2022. In fact, analysts estimate, at system level , reserves growing by 16% from 4,400 billion in October 2021 to 5,100 billion by June 2022. If each bank recorded the same percentage increase (+ 16%), the interest margin would suffer an average of 1%. (All rights reserved)
