Mr. Tuomas Välimäki, a board member of the central bank here in Finland, has recently published an article published on the bank’s website, where he set out the rationale of the two most important monetary policies currently being implemented by the European Central Bank through national central banks like the Bank of Finland.
Mr. Välimäki is the board member responsible for implementing monetary policy at the central bank. Here is an extract from his article of 25.8.2020:
“At present, we have provided (the Finnish banks) banks with more than EUR 20 billion in financing from the Bank of Finland. The interest rate on the loans we grant is negative. If and when our counterparties maintain their credit to the real economy, we will reimburse banks with 1% of the loan amount during the first year. In other words, debts of EUR 20 billion will be reduced to EUR 19.8 billion a year, even if they are not repaid at all. With such very exceptionally low-cost central bank financing, we are supporting the possibility for Finnish banks to finance Finnish companies and households. Thus, we support economic growth in Finland and promote Finnish employment. This is needed to ensure price stability in the euro area.”
The central bank is using both Quantitative Easing and Targeted Longer-Term Refinancing Operations (TLTROs) to channel money through banks to the real economy:
- Quantative Easing is an asset purchase programmes where they buy bonds from banks like government bonds, bank covered bonds, (basically packages of mortgage loans), and other asset-backed securities and corporate bonds. Further information on the programme is available on the ECB website.
- TLTROs are another huge programme where the central bank is lending to banks referred to above with very low interest rates that are much lower than what the banks pay in the markets. The interest rates for banks are negative and are probably near to Euribor minus 1% p.a. which represents a cost saving for banks in the region of 1.5% go 2% p.a. which means that a €5 billion loan from the central bank would increase the profits of the bank by some €75 million to €100 million each year.
According to their own recent reports both Nordea and OP have received €7 billion and €6 billion from the Bank of Finland which should boost their income by at least €105 million and €90 million respectively.
Since these loans are now in place and they can replace other sources of funding. Naturally one would think that the banks are making any new efforts to lend the money to the real economy to keep it rolling smoothly. Most taxpayers would want that to be the clear intention of implementing this policy, because such a policy should not be to enrich bankers or improve the profitability of banks, which would be a misuse of taxpayers’ money. Central
However, there is reason to be worried because you will have noted that Mr. Välimäki wrote above “If and when our counterparties maintain their credit to the real economy, we will reimburse banks with 1% of the loan amount during the first year”. He does not talk about new lending but appears to be saying that maintaining existing loans is enough and that new lending is not necessary…
Perhaps he is means that the central bank is trying to stop the banks demanding early repayment of their loans, but banks hardly ever demand early repayment of loans to good customers. Most of their lending are made to credit worthy private households or to strong big companies so keeping these loans alive is just increases their profits. It appears that the central bank does indeed want to enrich bankers or subsidize the dividends of shareholders, i.e. increase bank profits…
… and this impression is strengthened by recent statements from our Minister of Economic Affairs, Mr. Lintilä, who made a statement in the media (HS 29.8.2020) after meeting with the CEOs of key banks last week. “They said there was no demand for the money… I understand damn well that companies don’t take out a loan if they can’t see the opposite. They prefer to push their activities down and lift them up again when the opposite shore is visible again.”
So the whole picture is pretty grim in the midst of this pandemic and economic downturn! While the real economy is suffering from having to pay operating expenses, like rent, salaries, taxes and interest on loans, while suffering from huge cuts in revenue, banks are happily receiving huge subsidies from our central bank without even having to open their doors for new business. That may be a sustainable business for the banks, but hardly for the real economy!
Photo: Suomen Pankki