April 30, 2020 / 3:28 PM / a month ago

ECB has 3 bln euro gift for virus-hit euro zone banks

* Pictet puts net subsidy for banks at 3 bln euro

* Scope says new scheme could fuel carry trade

By Francesco Canepa and Balazs Koranyi

FRANKFURT, April 30 (Reuters) - Euro zone banks may now earn as much as 3 billion euros ($3.28 billion) by borrowing from the European Central Bank, welcome respite for a sector battered by the coronavirus outbreak and its fallout.

With the euro zone’s economy deep in recession, banks are bracing for a new wave of delinquencies from clients hit by the coronavirus pandemic and the subsequent economic shutdown.

In its latest move to support the sector, the ECB said on Thursday it would now pay banks at least 0.50% and up to 1% if they tap its three-year loan auctions.

This is a 25 basis points increase from when the terms of these Targeted Long Term Refinancing Operations (TLTRO) were last eased in March.

The ECB’s largesse will translate in a subsidy to the banking sector even after subtracting what banks pay to the central bank for parking cash in its coffers.

“The ECB’s decision to lower the minimum TLTRO rate to -1% is absolutely massive,” Frederik Ducrozet, a strategist at Pictet Wealth Management, tweeted.

“This will result in a net transfer of up to 3 billion euros to the banking sector while ensuring the financing of the real economy.”

The latest decision follows an easing of collateral rules and supervisory requirements in recent weeks — all aimed at blunting the effects of the pandemic on a sector the ECB relies on to pass on its stimulus to the economy.

Under the new ECB’s schemes, they will earn 0.50% for one year from June by simply tapping the TLTRO auction and 1% if they pass on the cash to households or companies.

To prevent any liquidity crunch the ECB also unveiled seven new Pandemic Emergency Longer-Term Refinancing Operations (PELTRO) at which banks will get as much credit as they want and earn 25 basis points.

This may prove enticing in particular for lenders in peripheral countries that can use the cash to buy higher-yielding domestic government bonds and pocket the difference in interest rates.

“PELTRO acts as a further backstop to liquidity against a wider collateral pool,” said Marco Troiano, a director at Scope Ratings. “One risk is that peripheral banks will materially add to sovereign risk for the carry trade.”

Bank investors were unimpressed, however, having hoped the ECB would go further by announcing purchases of junk-rated bonds - an option that President Christine Lagarde refused to rule out during her news conference on Thursday.

The Euro STOXX banking index was down 5.2% at 1558 GMT, giving up nearly half of this week’s bounce. The index has fallen by some 40% since the start of the year. ($1 = 0.9142 euros) (Reporting by Francesco Canepa; Editing by Jon Boyle)

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