TLTRO III is cryogenics for banks
The European Central Bank’s cheap lending programme for European banks will prolong the lives of some, but not cure them.
The weaker portion of banks in Europe faces big problems. The return on equity for euro area banks as a whole was around 6% last year, some way below the estimated cost of equity of 8%-10%, according to the ECB.
Technological disruption, and the rush to beat it through increased spending, risk the dreaded negative jaws, where operating expenses rise faster than income growth.
More immediately, the rates outlook looks more depressing than a year ago. The ECB guided on Thursday towards rates staying unchanged for at least another year. And economic growth is expected to be sluggish.
Quite simply, large swathes of the banking sector face a lot of pain, sooner or later.
Stepping into the breach are the ECB's latest Targeted Longer-Term Refinancing Operations (TLTRO III), designed to boost credit provision to the real economy by helping smaller, weaker lenders with their funding. But it is no long-term fix.
The terms are tougher on banks than the previous TLTRO scheme, meaning that it is effectively tighter monetary policy just as the economy slows and banks grapple with squeezed margins.
Meanwhile, the largest likely recipient country of the new programme, Italy, looks set for another clash with the EU. The European Commission recommended an excessive deficit procedure on Wednesday as Italy failed to get its budget deficit under control.
TLTRO funding for Italian banks did not stop credit conditions in the country tightening last year when the two sides were at loggerheads; the same could easily happen again.
If the economy or markets do deteriorate further, it is hard to see some banks staying afloat without more meaningful handouts. The ECB may have to make TLTRO III a stronger dose yet.