He highlights that even with the baked in expectations of a deposit rate cut this may not even be enough to spur the banks into lending action
“In theory, that should encourage banks to shift cash to places they can get a higher return, such as liquidity-starved peripheral euro-zone banks, thereby encouraging new lending. But in practice, analysts are skeptical of a revival of the interbank market and fear banks will simply pass on the cost to customers, pushing borrowing costs up not down.”
LTRO’s are likely to go unused as banks say there is no demand for borrowing and that regulators have been pushing for the first lot to be paid back. That may not stop them making them available though
He says a targeted approach could be the way forward and something along the lines of the UK’s Funding for lending scheme.
Even so, a cheap central bank liquidity backstop—even if it isn’t widely used—could help bring down the cost of bank funding by allowing banks to pay less for deposits. This was how the Bank of England’s Funding for Lending Scheme helped spur the U.K. recovery, with banks passing on the benefits to their customers in the form of cheaper borrowing. Italian banks pay on average 1.2 percentage points more for deposits than German banks, notes Huw van Steenis of Morgan Stanley, so this move may in fact deliver a bigger boost to the economy than many expect.
It’s a handy article to peruse over for quick read to see the positives and negatives.
