European banks: the authorities are preparing to withdraw the crutches

Posted on Dec. 2021 at 16:12

They only admit it half-heartedly: if European banks have achieved such good results since the start of the year, they owe it first and foremost to the economic recovery and the rebound in financial markets, but also, in part, to public authorities.

At the height of the health crisis, the authorities not only supported the economy at arm’s length. But they also lent a hand to the banking sector, aligning the easing and financing mechanisms. Unless the Omicron variant comes to shake up the schedule, it is these exceptional sector aids that are starting, one by one, to be disconnected, as the economy returns to normal.

“It represented a form of subsidy”

One of the most emblematic decisions concerns TLTROs, these giant loans granted to banks at negative rates, on condition that they grant loans to SMEs. “As announced”, the Governing Council “expects” that these special conditions “will end in June 2022,” said the European Central Bank (ECB) after its last monetary policy meeting.

These loans, particularly taken out by French and Italian banks, have made it possible to finance loans to SMEs. But they were also a boon for the sector. “Nothing prevented it, but the banks borrowed at -1% and then replaced their liquidity at -0.5% with the ECB, pocketing the difference, points out a close supervisor. It was a form of subsidy. It had to stop. “

Another return to normal, the ECB said last week that it “would not extend beyond December 2021” a relief granted to banks in terms of liquidity: they are supposed to hold enough funds to last a month without having to resort to the markets (“liquidity ratio”), and the supervisors had tentatively accepted that they did not meet all the requirements. And in France, the High Council for Financial Stability (HCSF) hinted that the “countercyclical cushion”, an additional capital requirement, would be back in 2023.

Other flexibilities in force

However, other flexibilities remain in force. In particular, banks retain the possibility, at least until the end of 2022, of drawing on their capital buffers to lend more. Instead, supervisors have so far criticized the industry for not using it.

Another asset of the crisis will remain: the entry into force of the international “Basel III” agreement, which imposes new and more restrictive rules for banks in terms of capital, will not take place before 2023 in Europe, i.e. two years after the original schedule.

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