The European Central Bank, under a new drastic scheme, will be able to present banks with payment when they are lent money from its funds. This scheme is the first of its kind to encourage customers and companies to borrow.
The European Central Bank requires the other bank that will be able to loan billions of euros to also lend money to companies or individuals and as a reward they would only pay 0.4 percent of the amount borrowed. This program is made to help the economy and improve the lending release to four year and zero rate type of loans beginning in June.
The ECB’s new development will enable banks access to billions of euros worth of free loans from which they will receive a 0.4 per cent pay out based on the increase in their levels of lending to both consumers and companies.
The scheme is the most recent effort to boost the slow-down in lending will result in the ECB making available, from June, four times over four-year zero-rate loans to lenders.
Should the plan be a success it will highly benefit borrowers within the euro-zone however, critics have highlighted previous schemes set up by the ECB and their letdown to the economy. They also stress that banks will not want to issue debt to borrowers given the current economic outlook.
Not included under the scheme however is borrowing for the purpose of mortgages.
In effect of the scheme there will be a limit of up to around 1.7 trillion euros to cover all instance where it is used, however the ECB have said that the amount actually used will be more than likely less than that.
The time limits for banks to ultilise the new scheme will be the months of June, September, December and also March of 2017.
The current situation allows banks from the EU to borrow a 30 per cent limit on their present loans, the ECB predict that these amount to around 5.7 trillion euros.
This system will be in place for around two years and after this time ECB experts will then examine and evaluate if the banks that have borrowed under the scheme have managed to boost their loans. They will do this by analysing the levels and comparing them to the amount of loans being issued before.
In the case that banks display that they have increased their lending by 2.5 per cent or more under the scheme, which is called the targeted longer-term refinancing operation, the ECB will award them a pay out of a maximum of 0.4 percent of their borrowed amount.
Mario Draghi, the president of ECB announced at a press conference that:
“Banks will pay the (refi) rate at the time of bidding – so right now, zero – and they may even get a reduction of that rate which increases with the amount of loans they grant.”
He continued and added: “The maximum reduction will bring the rate … to the level of the deposit facility rate at the time of bidding,” as the bank decreased the deposit rate to -0.4 per cent.
“The amount that banks can borrow is linked to the amount of loans they have…So a bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities.”
Upon this news the share price of banks rose slightly in many southern countries like Italy, however rival banks within better economically performing countries such as Germany saw their share values fall.
There has been mixed reviews of the ECB’s scheme and several economists are unsure about the success it will have due to the fact that previous schemes in which the bank offered cheap loans saw very little interaction by banks.
Carsten Brzeski, a ING economist said:
“They are throwing money at the banks but it’s not a game changer.. The ECB cannot force the private sector to go to the bank to get money. Loans are already cheap. Have we seen a take-up in credit growth? No.”