ECB Cash Boost May Near $1.3 Trillion, Ex-Official Says

By Jeff Black and Sonia Sirletti

Banks are likely to take close to 1 trillion euros ($1.3 trillion) in cash auctions at the European Central Bank that begin this year, former Executive Board member Jose Manuel Gonzalez-Paramo said.
“I would not be surprised if we see between 700 billion euros and 900 billion euros,” in the so-called TLTRO operations that start on Sept. 18, said Gonzalez-Paramo, who now serves as an executive board member of Banco Bilbao Vizcaya Argentaria (BBVA) SA. “The banks are quite happy to request this money, and they are willing to lend. The take-up in Spain could be big.”
The ECB is seeking to revive lending to companies and households in the 18-nation euro area after a slump of more than two years. After a rate cut this
month, the TLTRO offer, which is tied to banks’ lending performance, became even more attractive as the funds are lent for four years at the rate prevailing on auction day plus 10 basis points. The first of two initial operations is alloted on Sept. 18, the second on Dec. 11, and thereafter banks can bid in quarterly operations until June 2016.
“You see demand for credit increasing in the case of Spain,” Gonzalez-Paramo said in a Sept. 11 interview in Milan. The ECB’s latest rate cut is “positive, in terms of making the TLTROs more of a success, because now the takeup I think is assured to be on the high side.”

Covered Bonds

The TLTROs are the first shot in a volley of stimulus driven by ECB President Mario Draghi this year. In addition to the liquidity support, the ECB will also start buying asset-backed securities and covered bonds. Draghi said yesterday that the aim is to return the central bank’s balance sheet to the early-2012 level of about 3 trillion euros.
At the same time, the ECB is due to announce the results of its year-long bank health check, the Comprehensive Assessment, in late October. If that goes well, banks may feel more optimistic in the Dec. 11 allotment, Gonzalez-Paramo said.
Before then, “I wouldn’t be surprised if you see more caution,” he said. “I would look at both combined. This is how CFOs are planning it, taking into account both.”
After its rate-setting meeting on Oct. 2, the ECB is scheduled to announce further details of its ABS plan, including more specifics on the kinds of assets it intends to buy. Gonzalez-Paramo said buying securities backed by residential real-estate loans, or RMBS, is a good way to generate as much cash as possible for banks to lend.

Market Operations

“What you can do is indirectly make room for the banks to lend to small and medium-sized businesses, and that’s why they’ve decided to enlarge the scope to RMBS,” he said. “You can’t however go so far as to create conditionality. The TLTRO already in a way is an overstretching of what a central bank is supposed to do, because it is kind of micro-managing the balance sheet.”
Gonzalez-Paramo served at the ECB from 2004 until May 2012, and oversaw the bank’s market operations as part of his duties. He’s been vocal on the need to regenerate the securitization market in Europe as an alternative source of funding to the economy.
BBVA appointed Gonzalez-Paramo, 56, as executive board director in charge of regulation in May 2013 amid a flurry of new rules implemented by European authorities to avoid a new financial crisis. He also heads an advisory group on the bank’s international business that reports to the chairman, Francisco Gonzalez.
Gonzalez-Paramo said Spain has little to fear from the results of the ECB’s bank health check, which comprises an asset review and a stress test in cooperation with the European Banking Association.

Spanish Banks

“For Spanish banks I don’t have any concerns,” Gonzalez-Paramo said. Lenders in the country, which have raised money and curbed risks to boost capital, went through similar scrutiny in 2012. That stress test was part of terms to win a European bailout of up to 100 billion euros.
Gonzalez-Paramo said he’s is confident that European banks won’t face big surprises in the ECB assessment and that they can plug any capital shortfall resulting from the review. A survey published by Goldman Sachs Group Inc. on Sept. 3 showed investors expect an aggregate capital shortfall at the 130 banks in the review of about 51 billion euros. “Should anything appear, it would not be at the top banks and would be very small.”
“Markets are not obsessed by the overall amount that may arise from the assessment as banks have raised a lot of capital in the last few quarters,” Gonzalez-Paramo said. “It means that the exercise is very likely to produce the goals that motivated the assessment in the first place, which is to provide credibility, confidence, transparency and comparable data.”