The European Central Bank has reduced the amount of ultra-low-cost loans it will offer to commercial banks after some of its board members criticized an overly generous initial plan.
Among measures the ECB on Thursday unveiled to support the pandemic-stricken economy, extending its program to fund banks at deeply negative rates – in effect paying them to borrow money – as long as they don’t cut back ready.
Until the change on Thursday, banks had been able to borrow up to half of their portfolio of eligible loans, or 2.9 billion euros, under the scheme – called long-term targeted refinancing operations (TLTROs).
The ECB initially proposed raising this limit to 60 percent in plans presented to its governing council. But after some board members objected, it was reduced to 55%, halving the program’s potential increase to € 300 billion, according to two people involved in the talks.
“There was a good argument made that we didn’t need to be too generous to the banks,” said one of the people. Another said: “There has been some setback on bank refinancing, so it has been cut for the sake of compromise.”
The cut in ECB support comes as its supervisory board prepares to meet next week to discuss whether to lift its general opposition to dividend-paying banks after a nine-month hiatus to preserve capital since start of the pandemic.
The Bank of England ad Thursday that UK banks could resume dividend payments, within limits, next year. But the ECB’s supervisory board is “divided” according to the two, who said it was likely to allow only the strongest banks to restart.
The ECB’s latest round of three-year TLTRO loans were launched earlier this year, when it became the first central bank to offer financing below its deposit rate to prevent the pandemic from continuing. triggers a credit crunch.
Banks have already borrowed more than 1.75 billion euros under this mechanism, which offers them financing at less than 1% on the condition of not reducing their loans compared to the previous year. On Thursday, the lowest rate was extended from next June until mid-2022.
Christine Lagarde, President of the ECB, said on Thursday that the period during which banks were to maintain their global loans was extended until the end of next year to make it “a little more difficult” to qualify for the “very attractive rate. By minus 1 percent.
She said the program was “clearly working for the effect we wanted” after adoption by banks exceeded expectations, their lending volumes increased and borrowing rates fell for businesses and households. .
But she added that the system had been expanded because signs had recently emerged of a “slight tightening” in bank lending – on terms they offer borrowers rather than higher lending rates.
Frederik Ducrozet, strategist at Pictet Wealth Management, said the ECB’s decision to cut its ultra-cheap lending was “a very bad signal” for its willingness to continue pushing the banking sector to keep the flow of credit going to the bank. economy despite the fallout from the pandemic.