ECB to Punish LTRO Taking Banks

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.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza