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Quantitative easing has both good and bad implications for Europe s banks
Jan 31st 2015
EUROPEAN bankers depressed by the miasma in Athens might cheer up a bit if they
focused on news from Frankfurt instead. The recent unveiling by the European
Central Bank (ECB) of a 1.1 trillion ($1.25 trillion) package of quantitative
easing (QE) the printing of money to purchase vast quantities of bonds should
be as heartwarming for them as a resurgence of the euro crisis is chilling.
Cynics might be forgiven for thinking QE is a policy designed purely to aid
financiers. Banks, after all, borrow vast sums of money (from bond markets,
depositors and other creditors) to acquire financial assets (corporate bonds,
say, or the promise to repay a loan with interest). Even looser monetary policy
helps the banks on both counts. On the one hand, it is cheaper for them to
borrow money as interest rates are pushed lower. On the other, to drive bond
yields down the ECB will have to drive bond prices up. Banks, which own lots of
them, will be the biggest sellers.
Without QE, bankers would now have been fretting about the prospect of
deflation. A fall in prices would inflate the real value of borrowers debts,
nudging some of them into default. More broadly, if consumers defer spending in
the hope that the items they want to buy will soon be cheaper, all businesses,
including banks, will suffer. Those threats have now eased.
The ECB s move will have other benefits, too, in particular if it helps pep up
the moribund European economy. QE has prompted a swift fall in the value of the
euro, which is good news for exporters. Some of them might decide that, thanks
to rising foreign demand, now is the time to take out a loan to expand. Exports
account for more than a quarter of the euro zone s output, a higher proportion
than in other parts of the rich world, so even a small increase will have a
sizeable impact.
But QE is also a threat to banks margins. The most basic measure of a lender s
profitability is the gap between what it charges borrowers and the interest it
has to pay depositors. But few depositors are now getting any interest at all
on their savings, and it is difficult for banks to offer them negative rates.
Borrowers, however, will expect cheaper loans. The result is a nasty pincer.
The assumption in the markets is that the ECB will keep interest rates low for
an extended period. That undermines another lucrative trick, whereby banks
borrow money repeatedly for short periods, while lending it out for long ones.
Such maturity transformation earns a good return in normal times, when
interest rates for long-term borrowing are much higher than those on short-term
loans. The expectation now, however, is that interest rates will stay lower
for longer . That has dramatically reduced the difference in rates for loans of
different maturities, and with it banks opportunity to profit.
Those depressed earnings might endure: in Japan and America long spells of QE
have left interest margins at their lowest levels in decades. Moreover,
European lenders start from a tricky position. As well as Greece s afflictions,
which may yet metastasise, many banks face harm from soured loans to Russia or
to faltering oil firms. Many banks have stretched balance-sheets after enduring
both the financial crisis and the euro-zone debacle. If QE helps preserve them
from further upheaval, that will at least be some comfort to finance-weary
citizens.