Banks benefit, through the three-year loan from the European Central Bank (ECB), from grants that can reach 120 billion euros, enough to pay all bonuses at financial sector firms in London for the next 24 years, according to Bloomberg. Royal Bank of Scotland, BNP Paribas and Societe Generale are among more than 500 banks that have from a 489 billion euro loan over three years from the ECB in December. Loans now have a 1% interest rate, less than one fourth of the average yield of 4.3% unsecured bonds but with priority payment in the last year, according to Commerzbank analysts.
As the loan program could reach a record 1,200 billion euros after a second auction of funds in February, savings for banks could be at 120 billion and would support with about 10% bank profits in Spain and Italy this year, Morgan Stanley estimates. “Banks can lend at only 1% and give the money away with much higher interest. It’s pretty good”, said Arnd Schaefer, an economist at German bank WestLB. ECB is flooding with cheap money the financial system to avoid a credit crunch after the unsecured bond market stalled last year and U.S. money market financing became unavailable.
Any bank in the euro area can borrow any amount desired, as long as it guarantees with eligible assets. Three banks that borrow from the ECB do not have to limit bonuses. Banks could borrow another 680 billion in the second auction of funds in three years, scheduled on February 29, according to a survey conducted by Goldman Sachs analysts. Loans provided by longer-term refinancing program (LTRO) would get to nearly 1,200 billion euros, surpassing the peak of 1,200 billion dollars of credit by Federal Reserve banks, reached after the collapse of Lehman Brothers.
Financial groups such as Morgan Stanley, JPMorgan Chase and Goldman Sachs have won about $13 billion by taking cheap money from the Fed and lending them on. Euro area banks have to refinance debts of over 600 billion euros this year, according to a Bank of England report in December. Thus, some credit institutions have chosen to borrow money from the ECB and to deposit it the ECB, at a rate of only 0.25%. Banks accept losing money just to not have to borrow from investors to refinance maturing debt. ECB deposits reached a record 528 billion euros in January and stood at 508 billion euros last week, according to central bank data.
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