The recent decision of
the European Central Bank (ECB) to accept Greek Bonds as collateral for the
financing of Greek banks due to the pandemic, was received as good news to the
profitability of Greek banks. According to the balance sheet of central bank of
Greece, funding of Greek banks have increased. According to Moody’s, the
decision of the ECB to accept as collateral Greek bonds, even though they are of
low investment grade(and reinstate the waiver), increased financing for the
month of April 2020, to €21.5 billion, (which is 8% of their total assets), from €12.4 billion in March.
How is the financing
achieved? Through the mechanism of Long term Repo Operations (LTRO). The ECB
offers money to banks for a period of 1 to 3 years at the repo rate, which
currently is -0.5%. The banks in return offer government securities as
collateral. The repo rate is the rate at which the central bank lends money to
commercial banks in the event of a shortfall of funds.
This is similar to open market operations where the US FED lends money to central banks and controls the money supply. The financing of Greek banks via the LTRO in conjunction with private deposits which increased during March 2020 at €145 billion, will clearly act as supportive to the net interest margin as well as profitability during this difficult period due to the pandemic.
Bill T. Alexandratos,
M.Sc. Finance
June 2020
