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The Telegraph reports ECB Firepower 'Dented' as Banks Shun Cheap New Loans.

Eurozone banks have shunned the cheap new loans offered by the European Central Bank to boost growth, prompting analysts to warn the “paltry” take-up would mean they are a “much less potent weapon”.

Just €3.4bn of the loans were given to the struggling region’s banks to help lift lending, despite predictions that up to €100bn would be taken up.

It was the third tranche of loans under the ECB’s targeted longer-term refinancing operations (TLTROs), which lend to banks at very favourable rates.

The ECB tried to make the loans more tempting to banks last week by extending their length to three years and lowering the possible interest rate to -0.5pc. The sweetener was part of a major stimulus push by the ECB to revive the region’s economy, accompanying a cut in interest rates and another round of quantitative easing.

Given that banks will soon pay back €32bn of loans from the second tranche of the loans, the net effect is actually a decline in bank liquidity.

Jack Allen-Reynolds, an economist at Capital Economics, warned that the ECB would need to make the terms of the TLTROs “much more generous” before they can stimulate the economy. The “surprisingly low”uptake was “negligible” with the maximum available to banks at around €430bn.

Not Surprising

The above report is not surprising in the least.

The ECB and Jack Allen-Reynolds are both wrong.

There is no demand for money.

"As Long As It Takes"

On the day the ECB announced the alleged stimulus, I commented ECB's Counterproductive QE: Whatever It Takes Morphs Into "As Long As It Takes"

I fully expected little demand for new loans. Let's discuss why.

Banks Lend Under Two Conditions

  1. They are not capital impaired
  2. They believe they have good credit risks

If either condition is false, then banks don't lend.

One cannot judge the first point with stress-free "stress tests".

Stress tests are not designed to determine stress, they are designed to fool the public as to how much stress there really is. Eventually, capital impaired banks figure it out no matter what the stress tests say.

In regards to point two, banks do not need good credit risks, they only need to believe they have good credit risks.

In the Great Financial Crisis, banks knew people could not afford homes but they believed rising asset prices would prevent a bank debacle. Banks fully expected their customers would get clobbered but they did not give a damn about that.

Instead, prices sank and people walked away from their homes. Walking away was an unforeseen event. Banks took on massive credit risk but did not understand that until people started walking away.

ECB's Fundamental Misunderstanding

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Understanding the above lending conditions, how the heck did anyone think that lowering the rate from -0.40% to -0.50% would do anything?

It seems the ECB does not have a basic understanding of bank lending requirements.

What's Going On?

Either European banks are more capital impaired than the ECB wants everyone to believe, or banks believe there are few good credit risks worth taking.

Take your pick. I expect both are true.

ECB and Fed Both Clueless But Advantage Fed

Forcing more excess reserve into the system then charging banks interest on them is especially counterproductive.

The ECB's negative interest rates are hurting bank profits.

In contrast, the Fed slowly bailed out banks over time by paying interest on excess reserves.

Current State of Affairs

  • The Fed blew equity and junk bond bubbles, but it bailed out the banks, at least for now.
  • The ECB blew junk bond and sovereign bond bubbles while punishing the banks. The entire Eurozone banking system is at risk.

Deposit Flight

Note that Danish and Swiss Banks to Charge Customers 0.75% Interest on Large Deposits

It cannot possibly do any good.

On a comparative basis, it seems the Fed did the better thing.

That's not saying much other than how horribly wrong ECB policy has been.

QE Debate

Meanwhile, a QE debate rages: What Did Powell Mean by "Need to Resume Balance Sheet Growth"?

Perhaps the the Fed wanted to open the door for more QE later but without alarming the market of that.

Regardless, more QE US-Style cannot possibly accomplish anything good.


One of my readers scoffed at the notion "There is no demand for money".

Let me rephrase "There is no demand for credit other than for speculative purposes and/or from borrowers not worthy of credit."

Mike "Mish" Shedlock