In the context of the general mobilisation against the coronavirus, Reclaim Finance believes that the ECB’s exceptional response, while undoubtedly helping to maintain market liquidity, may well miss the essential point: helping the most vulnerable and protecting the future.
What is the ECB’s prescription for the coronavirus? The ECB activated monetary levers to increase market liquidity and relaxed prudential rules to “lighten” the workload of banks and give them “room to manoeuvre.”
In practice, this remedy could only bring little benefit to the most vulnerable companies and households and contributes to the financing of fossil fuels, while weakening financial risk prevention mechanisms.
Liquidity…for large companies
The ECB’s monetary policy is based mainly on two levers:
1. Quantitative easing: The Central Bank buys corporate, bank and government bonds and securities directly.
- On March 12 and 18, the ECB announced an increase in asset purchases of €870 billion – 36% of France’s GDP – to reach €1.01 trillion for the year 2020. Depending on the policy adopted by the ECB with regard to the repurchase of government bonds, they will represent between €70 and €210 billion in repurchased corporate securities. (Read our article “€870 billion extra QE: how much for the most polluting companies?”)
- Corporate bond buybacks concern all sectors without distinction and depend largely on the presence of companies on the capital markets. These funds will therefore not benefit small companies and households but will mainly go tot large companies and, among them, the most polluting companies: The latter could receive between €40 and €132 billion in additional financing through this channel. (Read our article “€870 billion additional QE: how much will go to the most polluting companies?”)
2. Loans: Several types of loans with variable maturities and rates allow banks to finance themselves by depositing assets (collateral) with the Central Bank.
- On March 12, the ECB adjusted its long-term refinancing operations – loans granted for four years – by introducing targeted loans (LTROs) at a rate of -0.5%. They will play a bridging role until the launch of TLTRO III in June 2020. These will then be granted on particularly favourable terms until June 2021, with a rate of -0.25% that falls to -0.75% for banks complying with the ECB’s lending requirements. With these provisions, banks will be remunerated for the loans they grant, but nothing suggests that these loans will help those most affected.
- At least, there is a need for supervision to ensure that the loans granted by banks through the LTRO and TLTRO III give priority support to small and medium-sized enterprises and households and are granted at rates close to the refinancing rates, i.e. zero.
- Moreover, the assets taken as collateral by the Central Bank against these loans do not take into account carbon impact nor climate risks. Banks can finance themselves by depositing particularly polluting assets as collateral, a problematic situation because the acceptance of a collateral asset by a central bank contributes to its valuation on the markets. The exclusion of assets linked to the coal and unconventional oil and gas sectors from the list of collateral is a first and indispensable step towards a responsible monetary policy (see Our demands to central banks).
Without these adjustments, the primary beneficiaries of monetary policy will always be banks and large corporations.
The relaxation of rules of which banks dreamed
The ECB pronounced the relaxation of prudential rules on banks’ capital and liquidity requirements, the postponement of European stress tests and the granting of individual adjustments. The latter leaves considerable room for manoeuvre to national banks.
Banks will be able to reduce their reserves, and the rules governing these legal obligations are open. The various “counter-cyclical cushions,” aimed in particular at dealing with systemic and variable risks according to national regulations, will probably be lowered as well in France where they have been reduced to zero.
This regulatory relaxation is applicable to all banks without distinction. Again, there are no criteria to ensure that the unblocked financing capacity benefits those who need it most.
Moreover, the reduction in banks’ capital requirements increases the existing gaps in the coverage of risks related to carbon assets, which are still very poorly taken into account. However, these assets should require additional provisions to reflect the risks they pose to the financial system and reduce their attractiveness (see Our demands to central banks). The little consideration given to climate risks coupled with a reduction in the quality and quantity of capital increases the risk of systemic crisis, especially since the current crisis is indicative of the low resilience of the financial system to exogenous shocks such as those of climate change.
Although the Banque de France had announced its first climate stress tests for 2020, the postponement of the European stress tests suggests a step back. Since climate risks are now unanimously recognised as a danger and the under-preparedness of financial institutions and regulators is obvious, the postponed stress tests will have to take climate risks into account and France would benefit from maintaining its announcements. Moreover, banks should continue to test their resilience; 2020 should not become a blank year in terms of stress-testing, nor a year of retreat in prudential regulation.