European Central Bank’s 120 Billion Euro Subsidy Enhances Bank Profit

 

European Central Bank President_Mario Draghi

European Central Bank President_Mario Draghi

The European Central bank subsidy that could reach as high upto 120 Billion Euros has benefited many banks. The European Central Bank subsidy ($158 Billion) could very well be enough to pay every bonus at financial firms in London for the next 24 years at today’s levels.

Mario Draghi’s Subsidy Plan

Royal Bank of Scotland Group Plc, BNP Paribas SA and Societe Generale SA are among more than 500 banks that took 489 billion Euros of three-year loans, its latest long-term refinancing operation, from the Frankfurt-based ECB at a December sale. According to Commerzbank AG’s statement given to an industrial magazine, the loans carry 1 percent annual interest rate, which is less than a quarter of the 4.3 percent average yield on euro-denominated senior unsecured bank debt of all maturities in the past year.

This three-year lending facility from the European Central Bank has boosted investor appetite for European bank risk. With their concerns about bank liquidity alleviated by the 489 billion Euro of funding obtained by banks last December – far below market rates at 1% – investors have participated in transactions that would have been unthinkable a few weeks ago.

European Central Bank’s Money Off

The European Central Bank is overflowing the banking system with ‘money off’ in an offer to ward off a credit crisis after the market for unsecured bank debt was confiscated last year and funding from U.S. money markets disappeared. Any bank in the region can borrow an unlimited amount, provided it pledges eligible collateral. Business news report that lenders won’t face curbs on bonuses or dividends.

Richard Reid, director of research at lobby group International Centre for Financial Regulation in London and a former managing director at Citigroup Inc. said, “The central bank has pumped the market with unbelievably money off because wholesale markets are closed. Stronger banks will inevitably profit, but that is a secondary issue for the ECB.”

The Second Auction

The lender banks could take as much as 680 billion Euros of loans at the second auction, which is scheduled on Feb. 29. This is expected to raise total borrowings from the European Central Bank’s longer-term refinancing operation, or LTRO, to a record 1.2 trillion euros, surpassing the $1.2 trillion in peak lending by the Federal Reserve to U.S. banks after Lehman Brothers Holdings Inc.’s 2008 collapse.

According to a data compiled by popular business magazine, banks including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs obtained an estimated $13 billion by borrowing cheaply from the Fed and lending at a higher rate.

Opportunity to Make Money

European lender banks are being encouraged by policy makers to use the European Central Bank cash to purchase domestic independent debt. Well, how would this work? It would push down borrowing costs for governments and reduce the risk that one or more countries in the region fail to pay.

The cascade of cash has lifted sentiment in the euro zone, and may even help the region avoid a serious economic downturn. But it is not yet clear how banks are using the money, and whether they will spend it wisely. Some banks — no one knows how many — are bound to use it to cover up past mismanagement and books full of bad assets.

Mario Draghi, European Central Bank President avoided issues about whether the bank could help Greece lighten its debt crisis by getting involved in a bond record deal being discussed with creditors.

 

Dhwani Shah

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