Friday 27 April 2018

Greece crisis forced ECB to keep cheap funds for banks

Brendan Keenan

Brendan Keenan

THE European Central Bank decided to maintain some of its support for the banking system in light of recent troubles surrounding Greece, ECB President Jean-Claude Trichet, said yesterday.

"We considered it was exactly appropriate taking into account the present situation," Mr Trichet said in an interview with Reuters Insider Television. Pressed on what present situation he was referring to, he agreed that he meant concerns over Greece.

The key decision was that for at least the next seven months, funds to keep banking operations running smoothly over seven-day periods would continue to be available in unlimited quantities at the ECB's benchmark rate -- currently 1pc.

Mr Trichet said this meant the overnight rate banks charged each other would not rise much in the short run. The overnight rate is currently at 0.32pc and the ECB regards this very cheap money as a key form of assistance.

From next month the ECB will return to the pre-crisis practice of offering three-month loans to the banks at a variable, instead of a fixed rate, it said yesterday.

Overnight rates

When the seven months are up, the ECB will have to decide whether and how to bring overnight rates back to the normal condition of being slightly above the benchmark rate.

These "exit" strategies are of particular importance to Irish banks, which are the heaviest users of ECB loans.

Data showed central bank deposits of more than €50bn in Irish lenders in January.

As stimulus is withdrawn, interest rates can be expected to rise, even before the ECB raises its own rate.

Irish banks also made significant use of the last 12-month loan at a fixed 1pc which was offered by the ECB in December. Banks will have to repay the first of these fixed loans in July. The ECB will have to decide what to do about this total eurozone repayment of €442bn -- the largest amount ever lent in a single ECB operation.

The ECB also tightened the conditions of this month's final six-month tender, saying the rate paid would be indexed to the average of the ECB's benchmark rate over the six months.

There seems little prospect of the rate being increased during that period and Mr Trichet said such decisions should not be taken as a signal on interest rates.

At the same time, the ECB also announced a new stimulus measure, confirming it would lend back "covered bonds" it bought during the crisis. This will help banks borrow funds on the market.

Meanwhile, the Bank of England yesterday decided for a second month not to resume its "money-printing" programme of buying government debt from banks. Its main interest rate is unchanged at 0.5pc.

Irish Independent

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