ECB seeks to cut subsidy to banks as rate hikes leave it on hook
  • Thursday, 1 December 2022

ECB seeks to cut subsidy to banks as rate hikes leave it on hook

The ECB has taken measures to soften the blow of the cost the central banks have due to the increased interest they need to pay on reserves deposited at the central bank (EUR 4.6 trillion). The interest rate calibration on the third series of targeted longer-term refinancing operations (TLTRO III) will be changed. Since 23 November, the interest rate on TLTRO III operations is indexed to the average applicable key ECB interest rates over this period. Next to the change in interest rate, three additional voluntary early repayment dates are introduced. Banks prepaid about EUR 300 billion at the first voluntary prepayment date; this was about half of what was expected by analysts.

 

Another action the ECB has taken is to set the remuneration of minimum reserves at the Eurosystem’s deposit facility rate instead of at the main refinancing operations rate. The difference between the two rates is currently 50 basis points. The actions taken by the ECB follow after both the Dutch National Bank and the Belgium National Bank indicated that they see the impact of the rate hikes on their capital position and losses are expected. The Swiss Central bank (SNB) opted for an alternative approach by introducing a bank reserve tiering. Deposits at the SNB receive the policy rate up to a certain threshold and nothing on balances above that threshold.