ECB Makes Profit on Funding

ECB nets €900m from crisis lending
By Ralph Atkins in Frankfurt

Published: September 13 2009 16:20 | Last updated: September 13 2009 16:20

The European Central Bank has made up to €1bn in extra profits from crisis-related emergency lending, but its caution on unconventional policy measures has curbed potential earnings, analysts estimate.

Extra liquidity pumped into the eurozone banking system since the collapse of Lehman Brothers last year has probably generated an extra €900m ($1.5bn, £780m) in profits so far, according to calculations by Goldman Sachs.

Some €300m of the total has been generated since June, when the ECB provided €442bn in one-year loans in its biggest liquidity providing operation.

The extra profits are on top of the sums that the ECB normally makes on its market operations. Although the interest rate currently charged by the ECB – 1 per cent – was the lowest in its 11-year history, revenues “remain juicy because of the quantity of liquidity that banks keep hoarding”, said Natacha Valla, European economist at Goldman Sachs in Paris.

From last October the ECB has been meeting, in full, eurozone banks’ demand for liquidity. Ms Valla argued, however, that by sticking largely to using policy instruments already in its armoury the ECB had forgone potentially far higher margins.

Profits on the ECB’s programme to buy €60bn in covered bonds – low risk assets issued by banks and backed by public sector loans and mortgages – could be dwarfed by those on schemes launched by other central banks, which have involved higher risk. The Financial Times reported last month that the US Federal Reserve had made a $14bn profit on its crisis loan programmes, with its purchases of commercial paper among its most lucrative operations.

Instead, the ECB has created arbitrage opportunities for eurozone banks, which have used liquidity provided by the central bank to buy large amounts of government bonds, including from some of the smaller eurozone countries and riskier assets. These, in turn, can be used as collateral to raise fresh funds from the ECB. Eurozone banks’ holdings of euro-denominated government bonds have increased by more than €200bn since last year.

The ECB would not comment on its likely profits, saying its annual accounts would be published in March. Jean-Claude Trichet, ECB president, said last week in an interview with the European parliament’s television service that making money was not the bank’s goal, adding: “The goal is to ensure that markets are working properly and to allow eurozone commercial banks to do their job.”

A priority for the ECB had been to ensure its political independence was not undermined by financial losses, said Gilles Moec, European economist at Deutsche Bank. By generating additional profits on its liquidity-providing operations, “the risk of going cap in hand to governments is much less”, he said.

Beyond that, the ECB’s decision not to embark on large-scale asset purchase programmes put it under less pressure than other central banks. “The amount of risk that they are taking is much less than in the UK and US, so in a way they don’t have to make as much of a profit as a buffer against potential losses.”