EU regulators overseeing next year’s long-awaited stress tests of the region’s banks are preparing to penalize any lender that remains reliant on the European Central Bank’s landmark cheap funding scheme.
The move will cause further friction in the banking sector as it underlines the tension between the need to maintain liquidity to lenders and attempts to wean them off their dependence on ECB support.
The European Banking Authority, the EU’s umbrella regulator, plans to measure banks’ reliance on the ECB’s long-term-financing operation, or LTRO, according to people familiar with the watchdog’s thinking.
Details of the test are still being drawn up but the plan would see the EBA mark down any bank that uses LTRO by comparing the subsidized scheme’s low financing costs with the real market funding rates the bank would otherwise have to pay.
Such treatment risks stigmatizing usage of the LTRO scheme, analysts say. “[This] could reduce [LTRO’s] attractiveness,” Morgan Stanley analysts wrote in a recent note to clients.
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