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ECB leaning toward rewarding banks who lend, skeptical on tiered rate: sources

Kitco News

WASHINGTON/FRANKFURT (Reuters) - European Central Bank policymakers are increasingly leaning toward rewarding banks for lending to households and businesses but are mostly skeptical about giving lenders a reprieve from a charge on their idle cash, four sources told Reuters.

The sources said rate-setters, who met in Frankfurt on Wednesday, were now open to offering a zero or even negative interest rate to banks that pass through into the economy the cash they borrow under the ECB’s third Targeted Long-Term Refinancing Operation (TLTRO III), due to start in September.

ECB President Mario Draghi said on Wednesday that policymakers did not discuss the terms of the upcoming TLTRO at their meeting and would decide on the matter when they have more information about the state of the economy and bank lending, flagging the bank’s June gathering as a possible date.

With the growth outlook fading faster than feared, even hawkish policymakers have given up pricing the loans at the private market rate. Some are even discussing offering the TLTROs at minus 0.4 percent, which is currently the ECB’s deposit rate, the sources said.

Draghi also said policymakers were considering the need to mitigate the impact of the ECB’s negative deposit rate on lenders’ profits, a coded reference to a tiered system where some excess reserves are exempted from that charge.

But this option, which is being studied by the ECB’s staff and has already been adopted by countries such as Japan and Switzerland, met with widespread scepticism on the Governing Council, the sources said.

Many rate setters felt that the relief for banks, which are currently paying a 0.4 percent annualized rate of interest on some 1.9 trillion euro ($2.14 trillion) worth of idle cash, would be modest and outweighed by the risks.

Some fear that investors might interpret the move as a stealth rate hike, which would be particularly felt in countries in the euro zone’s south where cash is still scarce.

Others flagged the risk that tiered rates could be used for an arbitrage in combination with the new TLTROs if banks could access ECB funding at a lower rate than they get on some of their reserves.

Some analysts said a tiered rate would make room for the ECB to cut its deposit rate farther — a prospect that one source said was nowhere near being discussed.

Even policymakers who were open to the idea of tiering acknowledged it was a hard sell and would further complicate the ECB’s policy framework, the sources said.

An ECB spokesman declined to comment.

Editing by Catherine Evans

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