ECB's New Interest Rate Policy "As Long As It Takes" Huge Failure Already


Last week, the ECB tried to make loans more tempting to banks, but the banks wanted no part of it.

The Telegraph reports ECB Firepower 'Dented' as Banks Shun Cheap New Loans.

Eurozone banks have shunned the cheap new loans offered by the European Central Bank to boost growth, prompting analysts to warn the “paltry” take-up would mean they are a “much less potent weapon”.

Just €3.4bn of the loans were given to the struggling region’s banks to help lift lending, despite predictions that up to €100bn would be taken up.

It was the third tranche of loans under the ECB’s targeted longer-term refinancing operations (TLTROs), which lend to banks at very favourable rates.

The ECB tried to make the loans more tempting to banks last week by extending their length to three years and lowering the possible interest rate to -0.5pc. The sweetener was part of a major stimulus push by the ECB to revive the region’s economy, accompanying a cut in interest rates and another round of quantitative easing.

Given that banks will soon pay back €32bn of loans from the second tranche of the loans, the net effect is actually a decline in bank liquidity.

Jack Allen-Reynolds, an economist at Capital Economics, warned that the ECB would need to make the terms of the TLTROs “much more generous” before they can stimulate the economy. The “surprisingly low”uptake was “negligible” with the maximum available to banks at around €430bn.

Not Surprising

The above report is not surprising in the least.

The ECB and Jack Allen-Reynolds are both wrong.

There is no demand for money.

"As Long As It Takes"

On the day the ECB announced the alleged stimulus, I commented ECB's Counterproductive QE: Whatever It Takes Morphs Into "As Long As It Takes"

I fully expected little demand for new loans. Let's discuss why.

Banks Lend Under Two Conditions

  1. They are not capital impaired
  2. They believe they have good credit risks

If either condition is false, then banks don't lend.

One cannot judge the first point with stress-free "stress tests".

Stress tests are not designed to determine stress, they are designed to fool the public as to how much stress there really is. Eventually, capital impaired banks figure it out no matter what the stress tests say.

In regards to point two, banks do not need good credit risks, they only need to believe they have good credit risks.

In the Great Financial Crisis, banks knew people could not afford homes but they believed rising asset prices would prevent a bank debacle. Banks fully expected their customers would get clobbered but they did not give a damn about that.

Instead, prices sank and people walked away from their homes. Walking away was an unforeseen event. Banks took on massive credit risk but did not understand that until people started walking away.

ECB's Fundamental Misunderstanding

Understanding the above lending conditions, how the heck did anyone think that lowering the rate from -0.40% to -0.50% would do anything?

It seems the ECB does not have a basic understanding of bank lending requirements.

What's Going On?

Either European banks are more capital impaired than the ECB wants everyone to believe, or banks believe there are few good credit risks worth taking.

Take your pick. I expect both are true.

ECB and Fed Both Clueless But Advantage Fed

Forcing more excess reserve into the system then charging banks interest on them is especially counterproductive.

The ECB's negative interest rates are hurting bank profits.

In contrast, the Fed slowly bailed out banks over time by paying interest on excess reserves.

Current State of Affairs

  • The Fed blew equity and junk bond bubbles, but it bailed out the banks, at least for now.
  • The ECB blew junk bond and sovereign bond bubbles while punishing the banks. The entire Eurozone banking system is at risk.

Deposit Flight

Note that Danish and Swiss Banks to Charge Customers 0.75% Interest on Large Deposits

It cannot possibly do any good.

On a comparative basis, it seems the Fed did the better thing.

That's not saying much other than how horribly wrong ECB policy has been.

QE Debate

Meanwhile, a QE debate rages: What Did Powell Mean by "Need to Resume Balance Sheet Growth"?

Perhaps the the Fed wanted to open the door for more QE later but without alarming the market of that.

Regardless, more QE US-Style cannot possibly accomplish anything good.


One of my readers scoffed at the notion "There is no demand for money".

Let me rephrase "There is no demand for credit other than for speculative purposes and/or from borrowers not worthy of credit."

Mike "Mish" Shedlock

Comments (20)
No. 1-9
Country Bob
Country Bob

Deutche Bank, Commerzbank, SocGen, BNP and Unicredito are all capital impaired (many other EU banks are also, just naming the big ones in anchor countries). I don't know if all these banks are completely insolvent, and to what extent corrupt politicians will bail out favored entities -- but no matter how you slice it, these big banks are in no position to make significant new loans.

If there were any banks capable of lending meaningful amounts, its not clear there are economically viable projects to lend to (public or private). Certainly the risk involved with any project would exceed centrally planned interest rates. Ergo, if there was a big project to fund, a competent bank would have to charge more than 1% to cover the risk.

Central economic planning destroyed the Soviet Union, it destroyed Japan. It destroyed the EU. Its rapidly destroying China and the US too.


Do any of these "smartest people in the room" ever think of the massive spending and productivity improvements they destroyed with negative interest rates?

Savers, with their interest on their deposit, used to spend lots of money on stuff and serveries.

Do they think reckless borrowers will spend more and with better allocations?


Danish and Swiss Banks to Charge Customers 0.75% Interest on Large Deposits.

This means 1) deposit flight 2) less money in circulation to finance the economy 3) real economy weakens.


"There is no demand for money."



-sorry, repost due to typo (private debt iso public) What I find most interesting is the attitude from Germany and The Netherlands. Both Jens Weidmann (head of German CB) and Klaas Knot (head of Dutch CB) aren't happy with the latest stimulus packages. There is certainly trouble in the ranks and there is an increase of discussions on the matter in the press of said countries. Now, while the private debt is high in The Netherlands, the largest bank is relatively stable, especially since the capital requirements are higher than the average European rates. Regulations also forced Dutch banks to repay the bailoutcosts in the form of taxation. Just to illustrate, the Dutch and the Germans won't simply roll over again as they might have done in the last crisis. Perhaps the support has been stretched too thin over the past decade and I guess we'll find out soon enough.


How time flies! Seems like yesterday that Treasury Secretary Hank Paulson, former CEO of Goldman Sachs, was pitching a $700 Billion 'save the world plan' to the Senate Banking Committee. Actually, it'll be 11 years ago tomorrow.

I've often wondered how the pitch would have gone had he slipped and said, $4.3 Trillion, or "Then God help all of us Bankers" instead of, "Then God help us all" if you don't give me access to the taxpayers' purse. Oh well, they've bought an 11 year postponement of a recession...whatever it takes.


The non-borrowing banks expect even lower rates. It's not just not being able to find good credit risks.

Why take money at -0.5% when no one knows where the bottom is once through zero?

Could be -1% in no time then lower still.




One of my readers scoffed at the notion "There is no demand for money".

Let me rephrase "There is no demand for credit other than for speculative purposes and/or from borrowers not worthy of credit."


. Government cannot force banks to borrow from the ECB (at least for now). . Banks can't force companies/individuals to borrow. . Government cannot force companies to hire people. . Companies can't force people to buy their products. . Companies can't manufacture sales; but they can manipulate profits.

The Proposed Solution: Helicopter money for the people. Guaranteed basic income. Government borrows/prints unlimited $$ at zero interest rates with perpetual maturity.


"There is no demand for credit other than for speculative purposes and/or from borrowers not worthy of credit."

Recently I paid a visit to a close-by bank to ask whether they would provide me with renovation loan. This due to the fact that my actual banks branch is very far from my work location so was contemplating the change. I was greeted by a very nice polite young lady and we went through all kind of aspects. Since I am an entrepreneur - small scale, income varies - she asked for someone as guarantor and I had a such person available with steady income.

The she proceeded telling me that they can't provide a renovation loan which would fall under 'house loans' interest being around 2-3% pa but instead of 'house improving' which would be considered as a consumer loan and interest in this case being around 5%.

Finally the bank considered me being too much of a risk, the property (always been rented out) too far from 'good location' and they came up with an appreciation figure of 50% of the real estate agents valuation which was not enough to cover the loan sum. The value was appreciated to the 70% out of that 50% so actually they were offering to loan 35% of the property's estimated value.

So next summer I will pay from my pocket and that will do. That said, I have had loans before, always paid on time, have no records of missed payments and so on. Thought the property would be enough collateral but it seems not. Banks truly seem to play the safe bets at the moment.

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