[Asia Economy Reporter Jeong Hyunjin] The European Central Bank (ECB) is reportedly considering measures to limit additional profits made by banks from loans provided at ultra-low interest rates during the COVID-19 pandemic to prevent credit crunches in financial markets. This comes as the ECB has announced plans to raise its key interest rate for the first time in 11 years this month, signaling a gradual reduction of the liquidity expansion measures it had implemented.
On the 3rd (local time), major foreign media outlets, citing multiple sources, reported that the ECB is contemplating changes to the terms of the Targeted Longer-Term Refinancing Operations (TLTRO), an ultra-low interest long-term loan program initiated in September 2019. This is due to European banks borrowing cheaply from the ECB through TLTRO and then redepositing those funds back with the ECB to earn profits from the interest rate differential. The scale of the TLTRO program is approximately 2.2 trillion euros (about 3,000 trillion Korean won).
The ECB began issuing TLTRO loans in September 2019, initially at an interest rate of -0.5%, which was lowered to -1.0% after the pandemic, with the loan limits effectively made unlimited. Last month, the ECB restored the TLTRO loan interest rate to -0.5%, the same level as the deposit rate, but the amount of loan repayments by banks was only 74 billion euros, less than expected, suggesting that banks are considering profits from the interest rate hikes, according to foreign media analysis.
Sources analyzed that as the ECB raises rates and loan interest rates for households and businesses increase, it would be politically difficult to accept banks making profits with taxpayer support. These concerns have intensified as the ECB decided to implement rate hikes starting this month. With the ECB expected to raise the key interest rate by 0.25 percentage points this month and possibly further in September, bank profits from this are expected to increase.
Morgan Stanley projected that European banks, by borrowing ultra-low interest loans and depositing them with the ECB, could earn profits ranging from 4 billion to 24 billion euros depending on the pace of rate hikes until the program ends in December 2024. Morgan Stanley also estimated that if the ECB raises the deposit rate to 0.75% by the end of this year, banks that took TLTRO loans in June 2020 could earn a margin of 0.6% by the time of repayment in June 2023.
A chief financial officer (CFO) of a European bank said, "This deal is quite profitable for us," adding, "As banks, it would be difficult to speak out loudly about this. From the bank's perspective, we do not want to say that we profited from the pandemic." Foreign media reported that about 740 banks applied for the program in June 2020, but the actual number of participating banks has not been disclosed.
The ECB is currently reviewing changes to the loan terms for banks. The ECB defended the TLTRO program, stating, "Without these (ultra-low interest loans), the real economy would have faced even greater difficulties during the pandemic." However, foreign media reported that the ECB did not comment on the profits made by banks or possible measures to halt the program.
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