Banks rushed to borrow a record € 1.3 trillion from the European Central Bank at deeply negative interest rates as part of the latest monetary policy campaign to increase liquidity in the economy of the euro zone hit by the pandemic.

This is the first time that a large central bank has offered banks multi-year loans at an interest rate lower than its main deposit rate, introducing a so-called dual rate system.

The ECB said on Thursday that the banks had asked to borrow 1.31 trillion euros as part of its main refinancing program, which will lend them money over three years at ultra-cheap rates as low as less. 1%, provided they meet certain loan thresholds.

Since the ECB’s main deposit rate is minus 0.5%, the ultra-cheap loan is actually a subsidy to the banking system and provides further evidence of how the ECB is doing everything to trying to prevent the pandemic from causing a credit crunch.

Banks are expected to use around 765 billion euros of ultra-cheap loans to repay past ECB loans that are about to fall due. But they are expected to use a large chunk of the remaining € 543 billion to buy bonds issued by their own governments, earning them an instant profit on the “carry trade” between the negative ECB rate and the higher yield on the banks. government bonds.

“Loop of fate”

While this will support the € 1 trillion to € 1.5 trillion in additional debt that is expected to be issued by euro area governments to fund their pandemic responses this year, analysts say it will add to the “Catastrophic loop” linking the fate of banks more closely to that of their national governments.

“The increase in banks’ sovereign exposure has generally been viewed as negative in recent years,” Jefferies banking analysts said in a note. “However, the policy stance is changing and with public debt levels expected to rise, it may make sense for banks to channel excess liquidity in that direction.”

– Copyright The Financial Times Limited 2020