The European Central Bank (ECB) is discussing ways to stop big banks earning billions of euros of extra profit from the cheap lending scheme it launched during the pandemic once it starts to raise interest rates, according to a report in London newspaper The Financial Times.
The newspaper said that €2.2 trillionn of subsidised loans provided by the ECB to banks helped to avert a credit crunch when the Covid-19 crisis hit.
But the newspaper said, citing analysts, that with the central bank now planning to raise rates, it is set to provide a bonanza of extra earnings worth up to €24 billion for eurozone banks.
The Financial Times said the ECB’s governing council will now discuss how it could curb the extra margin that hundreds of banks will be able to earn from its subsidised loans by placing them back on deposit at the central bank, “according to three people familiar with the plans.”
The newspaper said its sources said it would be politically unacceptable for the ECB to provide banks with a taxpayer-backed profit while it is raising borrowing costs for households and businesses and most commercial lenders are paying bonuses to staff and distributing dividends to investors.
One option could be for the ECB to change the terms of the loans to reduce the chance for banks to make an automatic return on the money, just as it made them more attractive after the pandemic began in 2020.
The ECB declined to comment on how it could stop lenders making windfall gains.
Morgan Stanley estimated banks could earn between €4 billion and €24 billion of extra profit by putting the ECB’s cheap loans on deposit at the central bank from last month until the end of the scheme in December 2024.