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Banks will need “radical help”, Barclays argues. It points to several outcomes. One is that policymakers effectively do nothing, and accept lower rates of credit creation, which is politically significant. Another is a move to reduce the cost of bank liabilities, most obviously through the ability to charge households for deposits, which is politically explosive.
Yet another option would be increased non-bank lending - a theme that has bubbled away since the crisis, mostly in the form of NPL purchases. There is a sense that private equity purchases of existing credit lays the groundwork for private equity-owned origination of new credit, funded via securitisation. Barclays point out newly created government-sponsored enterprises could be involved in such a move.
Given none of these solutions is straight forward, Barclays says, the ECB may be forced to directly act. It could do so via the TLTRO program, which has already provided hundreds of billions of euros of cheap funding to banks, especially those in the periphery. The ECB could also add bank bonds to its asset purchase programme; this would be one way of driving down yields on bank borrowing without entering the political maelstrom of charging households for deposits.
Barclays refers to the bank bond QE suggestion as “extreme”. It goes into more detail in an earlier report this summer. The ECB already owns bank liabilities in the form of covered bonds (this was its first entry into asset purchases), and it lends against bank collateral through TLTRO. Both of these policies take the form of secured lending, however.
The other issue is that unsecured bank debt is now vulnerable to writedowns, because of post-crisis reforms which sought to subordinate it to deposits. The ECB would be buying unsecured bank debt, which is designed to collapse in value when things go wrong, but its intervention would be taking place precisely because something is going wrong. Then again, the ECB is not the traditional price-sensitive buyer.
Yet another complication with central bank purchases of bank debt is that the ECB is, through the Single Supervisory Mechanism, the regulator of European banks, and exercises some influence over the resolution process (it was the ECB that decided Banco Popular, back in 2017, was failing or likely to fail, which resulted in writedowns of its subordinated bank debt). [...]
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