On an earnings call in late April, Carlos Torres Vila, the chief executive of BBVA, confirmed that the Spanish bank had booked an additional €36m of revenues. The amount itself was far from extraordinary. What was unusual about the earnings, however, was that they effectively came from the European Central Bank.
Specifically, the increase involved BBVA factoring in an interest rate of minus 0.2 per cent on €24bn of ECB funding over a nine-month period.
The boost to the bottom line of BBVA, which had earnings of €1.2bn in the first quarter, is just one of many consequences of the ECB’s so-called “targeted longer-term refinancing operations” (TLTROs) — a vast wave of stimulus designed to support the eurozone’s banks.
As ECB policymakers meet in the Estonian capital of Tallinn on Thursday the question of whether they will signal a retreat from their bond-buying programme is likely to dominate. Analysts point out that the TLTRO programme has also been a key weapon in the central bank’s stimulus programme.
In March, the ECB pumped well over €200bn into the European banking sector in its final TLTRO, with an interest rate of zero, that could fall to as low as minus 40 basis points, depending on lending activity. It was their most generous stimulus yet.
While large banks such as BBVA draw on the funding, its most significant effect may lie elsewhere. Huw van Steenis, global head of strategy at Schroders, says the greatest beneficiaries of the funding have been smaller second and third-tier peripheral banks. Their profitability is likely to be most affected by the eventual withdrawal of the subsidies involved — especially for those smaller banks less able to fund themselves through wholesale markets.
“Several banks are structurally unprofitable without the ECB’s cheap funding,” analysts at rating agency Fitch noted in a report late last month. Historically, cheap long-term funding has allowed southern European banks to benefit from carry-trade gains on domestic government bonds, they argue, adding that this benefit has reduced as bond yields have tightened.
“Some of them [Italian banks] are unprofitable even with the ECB’s cheap funding,” adds Christian Scarafia, co-head of Western European Banks at Fitch.
Fitch also observes that the TLTRO funding is tied up with Italy’s management of the non-performing loans that beset its banks. “The weak asset quality in Italy is certainly the big issue in the country and access to cheap ECB funding has meant that banks could continue to operate without having to address the asset quality problem in a more decisive manner,” says Mr Scarafia.
In total, European banks now have approximately €760bn of funding from long-term lending schemes, most of which comes from the four rounds of the most recent programme launched in March 2016.
Most of the outstanding debt came at a time when bank profitability was under intense pressure from low interest rates. By 2021, the outstanding stock of free money will have fully matured. At that stage, its impact on profitability will become more apparent.
According to ECB data as of the end of April, Italian banks hold just over €250bn of the total long-term loans — almost a third of the total. Spain has €173bn, while French banks have €115bn and Germany has taken €95bn.
At the same time, the funding appears to play less of a role in stimulating economic activity through lending, and a much larger role in mitigating the pain that low interest rates — and poor asset quality — can inflict on banks.
“I don’t believe it’s fundamentally changed the demand for credit in the system,” says Mr van Steenis. “The second TLTRO was really only put in place as an offset to the deleterious impact of negative rates.”