Halister News

(Bloomberg) -- Money markets price more ECB easing at the March 10 meeting, and minutes of the central bank’s Jan. decision suggest the GC may be willing to do more amid significant downside risks.

• Near record-low EUR 5y5y inflation swaps hint at investor doubt policy can lift inflation to target any time soon; market volatility since the BOJ started negative rates shows growing concern further cuts may do more harm than good
• ECB’s Constancio says could take steps to ease impact of negative rates on banks
• ING’s Peter Vanden Houte says it’s far from clear what the ECB could still do as it’s starting to hit the boundaries of what monetary policy can achieve; BofAML analysts including Gilles Moec say some “left-field thinking” needed

WHY AN AGGRESSIVE DEPOSIT RATE CUT MAY NOT HAPPEN

• GC member Ewald Nowotny said expectations lost touch with reality back in Dec., and expressed concern they may become excessive again
• Forward swaps price ~13bps of easing in March; similar to pricing ahead of Dec. meeting, when ECB only cut by 10bps
• Economists surveyed by Bloomberg say -0.50% may be the lower bound; less than half say the policy is working
• Morgan Stanley analysts led by Elga Bartsch say even more negative rates could erode bank profitability; may spur banks to shrink and they’re less able to pass on costs compared with peers in smaller countries
• BofAML’s Moec says recent turmoil in banks argues against harming profitability further; BOJ move shows such decisions can easily be “drowned” by changes to market’s Fed outlook
• These concerns may mean the ECB cuts at a much slower pace than some anticipate, allowing it to monitor the impact, Barclays’s Giuseppe Maraffino says

WOULD TIERING RATES HELP?

• ECB could try to mitigate impact of more deeply negative rates on banks by introducing a multi-tiered system for central bank deposits, BNP analysts including Astrid Schilo say
• Barclays’s Maraffino warns any direct benefit wouldn’t be evenly distributed among banks, because liquidity surplus is mostly concentrated in core countries
• JPMorgan analysts say policy may encourage banks holding large amounts of excess reserves to trade with those who haven’t used up their exemption
• GC unlikely to cut the deposit rate more aggressively, even within a tiered system, given equity market turmoil and stress on banks following the BOJ move, Goldman Sachs analysts Silvia Ardagna and Rohan Khanna write

ARE TLTROs STILL AN OPTION?

• Yes. A number of analysts believe TLTROs would be sensible, given the final one is scheduled for June 2016
• BNP analysts say there’s evidence some Italian and Spanish banks don’t meeting the pre-condition of private-sector loan activity and aren’t qualified anymore
• ECB will ultimately have to ease conditions, as this could become an issue in September, when banks with shrinking loan flows have to pay back their TLTROs
• BofAML’s Moec says tweaking TLTRO rules to ease funding for banks would be an appropriate response to the current turmoil; one option would be to allow liquidity raised to be exempted from the deposit rate “tax”
• Barclay’s Maraffino suggests ECB could lower the cost of funding to zero, incentivize banks to use the borrowing to meet a lending target

EXPAND QE

• Expanding QE would be less useful for banks as their holdings are smaller than in the past and yields are lower, BNP says
• Rate-setters would need to consider removing the minimum yield floor on asset purchases and/or increasing the issue limit on non-CAC bonds, Deutsche Bank analysts Francis Yared and Dominic Konstam write
• They don’t need to lift the rate of buying but could say an increase in the share issuer limit on non-CAC bonds to 50% is an option for a later date, HSBC analysts Karen ward and Fabio Balboni say
• Goldman says, while unlikely, the GC could suggest buying be allocated according to a country’s debt market capitalization rather than the capital key contribution
• Most effective option would be to remove the minimum yield floor for purchases, Deutsche Bank analysts say
  • A more moderate solution could be to allow top-up purchases from NCBs that have reached the limit of their buying universe, to allow other NCBs with room to purchase to make up the difference, they add

COULD THE CENTRAL BANKS BUY NEW ASSET CLASSES?

• BNP says yields remain too low for even bonds to be a serious consideration for now, even as suggestions include semi-public debt, corporate or bank bonds, stocks or even goods
  • ECB could though announce an equivalent of the OMT program and lay out conditions for purchases in future; may also say when Italy bank SPVs attract a govt guarantee, this could qualify them as collateral for ECB liquidity-operations and for purchase
• Goldman says academic literature suggests ECB’s toolbox is far from exhausted
  • Central bank faces no legal constraints, can buy any financial instrument at any level of capital structure, and issued by financial and non-financial institutions, except for govt debt on primary market; would be a political decision to do so

--DEREK WALLBANK

(Bloomberg) -- ICBC Madrid branch is cooperating with police’s investigation on a money laundering case, Xinhua reports, citing an unidentified ICBC official.

• NOTE: Spanish Judge Orders Jail for Three Suspects in ICBC Probe

--DEREK WALLBANK