Europe’s Banks Get a Cash Boost From ECB Credit Moves

The European Central Bank wants to make sure credit is flowing into Europe’s economy to support its recovery as the pandemic drags on. Banks are cashing in.

Eurozone banks are making money from an ECB program that basically pays them to lend, boosting their earnings and helping offset some of the costs associated with the continent’s long-running negative interest rates.

The program shows the extent the ECB has been willing to keep economies in the eurozone afloat during the coronavirus pandemic by unleashing a flood of liquidity to businesses to avoid a credit crunch. Incentives on loans are particularly important in Europe because companies rely heavily on borrowings from banks, as opposed to the U.S., where companies issue bonds more often.

The so-called targeted longer-term refinancing operations, or TLTROs, were created in 2014. The ECB sweetened the deal for banks last year by lowering the interest rate on its loans to as little as minus 1%. So banks get paid to borrow from the central bank. In exchange, lenders must meet lending targets.

Many banks are borrowing even though they are flush with cash to take advantage of the deal. In the latest round of the program in June, banks took some €110 billion, the equivalent of $129 billion, from the ECB. That brought the total amount outstanding under TLTRO to more than €2 trillion, compared with less than €1 trillion before the rate cut. That is roughly half of the total excess liquidity in the eurozone banking system.

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