Eurozone banks hope for ECB lifeline as long-term loans start to mature

Frankfurt

EURO-AREA lenders are facing a cliff edge for their funding, and some are hoping that the European Central Bank (ECB) will help them out.

Around 722 billion euros (S$1,143 billion) of long-term loans granted to banks by the ECB will start maturing from 2020, and new regulatory standards means that replacement funds could be needed as soon as next year. One concern is that lenders could be forced to refinance just as market rates rise, spurred by tighter US policy and tensions such as Brexit and Italian politics.

Some banks have been in contact with the ECB to discuss the risk of letting those four-year loans expire without affordable alternatives being in place, according to people familiar with the conversations. Some discussions took place on the sidelines of the International Monetary Fund (IMF) meeting in Bali this month, the sources said, asking not to be named as the matter is confidential. An ECB spokesman declined to comment.

Any squeeze on banks threatens to undermine lending, slowing the euro area's economic expansion and potentially delaying the ECB's exit from crisis-era stimulus. The central bank's negative deposit rate is already depressing lenders' profitability, as ECB president Mario Draghi acknowledged at a press briefing after the IMF meeting.

The ECB's cheap four-year loans, known as Targeted Longer-Term Refinancing Operations or TLTROs, were doled out from 2014-2017 and were intended to push banks to lend more to companies and households. The repayment deadlines means that the region's massive excess liquidity will start contracting, putting upward pressure on market rates - unless the ECB starts a new round of funding.

"Importantly, this would hand back control of the eventual balance-sheet reduction to the policy makers," said Anatoli Annenkov, an economist at Societe Generale. "Moreover, it would help maintain high excess liquidity and anchor rates to the deposit rate, supporting the ECB's ability to control rates."

The topic will likely gain more attention next year when banks begin planning how to meet their financing needs under standards including the "net stable funding ratio" that determines the types of liquidity that they must hold. As funds with less than one year maturity do not count toward that calculation, banks may need to start refinancing from June 2019.

The impact of TLTRO maturity was discussed on Sept 25 by money-market participants in a contact group that regularly meets at the ECB. The summary of the meeting, published on Monday, said that "the replacement of TLTRO funds for NSFR (net stable funding ratio) purposes was seen as a challenge and would need to be carefully planned and included in banks' long-term funding and liquidity plans".

Mr Annenkov said that small and medium-sized banks across countries would see the greatest benefit from a new TLTRO round, as they are likely face more difficulty getting market funding.

Deutsche Bank analyst Paola Sabbione said that Italian banks would be particularly hard hit if the ECB does not offer new funding, after taking up about a third of the previous rounds.

"With their high TLTRO exposure and growing funding costs in correlation to sovereign spread widening, the Italian banks are more exposed to exit-strategy risks," she said in a note. "Deleveraging seems the most obvious response in the presence of prolonged funding stress."

One risk of issuing more TLTROs is that it might signal that the euro-area revival is still fragile, undermining the ECB's narrative that the domestic economy is solid and inflation is on track toward its goal.

Policymakers, who will hold a rate-setting meeting this week, are striving to end their crisis-era measures. They plan to cap their 2.6 trillion euro asset purchase programme in December, and acknowledge market expectations that rates will rise in late 2019. BLOOMBERG