By Francesco Canepa
FRANKFURT (Reuters) – European Central Bank policymakers want to reduce banks’ reliance on central bank cash and will tailor a fresh loan facility to curb appetite, four sources familiar with the discussion have told Reuters.
With growth slowing and business confidence fading, the ECB announced new stimulus measures last week to prop up a still- fragile economy, promising to put off raising interest rates and to give banks access to more multi-year loans from the central bank.
But the sources, who asked not to be named, said the economy was still far stronger than a few years ago, so any support should be less generous, reflecting healthier fundamentals.
One of the key questions still on the table is just how cheap the ECB cash should be and whether the ECB should restrict access to its multi-year credit, commonly known at targeted longer-term refinancing operations, or TLTROs.
An ECB committee working on the design of the TLTRO proposed setting the rate at a premium of 25 basis points above the ECB’s main refinancing rate, now at zero. Then, as now, that rate could be reduced progressively to encourage banks to meet, or then exceed, their lending quotas.
But doves from the EU’s periphery considered such a rate too high, not giving banks enough support, and asked staff to prepare a proposal with more favourable terms, the sources said. They noted that even at a zero percent rate, it would be 40 basis points more expensive than the previous TLTRO.
An ECB spokesman declined to comment.
The sources added that, for now, the main refinancing rate is considered the lowest achievable rate on the TLTROs. But they said the discussion remains open and, if the economy performed worse than expected, they could opt for an even lower, possibly negative, figure.
The need to assess the growth outlook also provided an argument for the Governing Council to take more time to decide the terms of the loan, suggesting that the June 6 meeting is the likeliest opportunity for the ECB to publish the final terms, the sources said.
A key argument for providing the loans is to roll over a previous TLTRO facility and avoid a sudden reduction in the ECB’s balance sheet. But policymakers also want to reduce banks’ reliance on ECB cash, the sources said.
Options under discussion include more stringent collateral rules on the new loans and more ambitious targets for lending volumes for those granted the knock-down rate.
While demand for the loans will depend on conditions, ECB calculations suggested the take-up of the new facility could be below 500 billion euros (428.1 billion pounds), compared with more than 700 billion in the previous round, with many northern European banks not rolling over previous facilities as they can borrow on the market on better terms.
The sources added that the question of tiering the ECB’s deposit rate to shield banks from negative rates had not been discussed.
“Any TLTRO-III rate at, or above the refi rate would lead to very low demand on top of TLTRO-II rollover (which could be a feature, not a bug, if growth picks up),” Frederik Ducrozet, an economist at Pictet Wealth Management, wrote on Twitter after Reuters’ article was originally published.
(Additional reporting by Balazs Koranyi; editing by Kevin Liffey, Larry King)