Today the Finnish Central Bank, a branch of the European Central Bank, made a surprisingly poor decision when they announced that they will start buying corporate commercial paper (CP) up to a maximum limit of €500 million.
This is nothing more than open-handed bank support because all corporate paper is issued through the Finnish banks and cannot be directly purchased by the Central Bank from the companies themselves. This means that the banks will certainly book significant profits from this operation.
The Central Bank is claiming that the CP market is closed because of the impact of the Coronavirus and that corporate debt issuance has stopped. The banks are thus able to profit regally from this, because they can sell off their current positions and buy higher yielding CP from their corporate customers, or just act as brokers for a fee.
More serious measures needs to be implemented to support SME’s, start-ups and micro entrepreneurs, and workers who are all now facing serious financial challenges.
This type of Central Bank policy is also ill-advised because banks are meant to maintain liquidity in the CP markets for their customers. The market closed down not because corporates refused to issue their CP’s, but because banks refused to buy because of possible downgrades of customers’ creditworthiness…
… the banks know that the Central Bank will enter the market when a “Liquidity Crisis” starts, allowing them to book increased profits from the situation.
The real problem in the financial markets is that SME’s and start-ups only have limited or no access to bank funding because they are too small or considered to be too risky. Banks only grant loans and liquidity facilities to relatively risk-free companies. Not only is bank financing limited but large companies also tend to treat these same small companies, their sub-contractors, as an effective source of liquidity, by being slow to make payments for products and services when the markets are faced with problems.
The Central Bank policy does absolutely nothing to help these small companies, while big companies only receive limited benefits which they seldom need.
This new Central Bank policy is largely worthless and expensive support for big banks at the taxpayers’ expense.
We can only hope that the government will seek out more constructive measures to support SME’s, start-ups and micro entrepreneurs, and workers who are all now facing serious financial challenges now that their activities are suffering because of the present crisis.