ECB planning to block lenders from giant windfall as rates rise

Bloomberg

The European Central Bank (ECB) is exploring ways to prevent banks from earning windfall profits from the subsidised lending program it launched during the pandemic, once it raises interest rates later this month, according to a report by the Financial Times.
The ECB provided €2.2 trillion of subsidized loans to banks during the Covid-19 crisis to avoid a credit crunch. With rates set to hike, that will provide extra profits worth up to €24 billion for euro area lenders, the FT said, citing analysts.
The ECB’s governing council is planning to discuss how to curb the extra margin banks could earn, by placing them back on deposit at the central bank, the FT reported.
The ECB is planning on its first interest-rate hike since 2011, having announced already in June details on planned rate increases in July, September with more to follow.
Providing taxpayer-backed profits to banks while raising borrowing costs for households and businesses would be “politically unacceptable” for the ECB, the FT reported.
ECB to Adjust Corporate Bond Holdings to Reflect Climate Risk
The ECB plans to rejig its corporate bond portfolio to favour issuers that pollute less, marking its most significant shift yet to weave environmental considerations into monetary policy.
The ECB will reinvest “the sizeable redemptions expected over the coming years” in a way that penalises companies with a big carbon footprint, according to a statement. The new plan will affect some 30 billion euros ($31.3 billion) worth of reinvestments each year, or around 10% of the ECB’s corporate portfolio, Executive Board member Isabel Schnabel said.
The ECB is adjusting a cornerstone of its toolbox amid a growing sense of anxiety that time is running out to address the threat posed by global warming. The United Nations Intergovernmental Panel on Climate Change has estimated that the planet might be on track for temperature increases that could be twice the limit set out in the Paris climate accord.
Meanwhile, the ECB has faced repeated criticism from environmental activists, who point to its holdings of carbon-heavy companies, such as Shell Plc, Eni SpA, and TotalEnergies SE.
We are in the midst of multiple crises, including climate change, that are challenging our society and economy. Within our mandate, we are taking concrete steps to incorporate climate change into our monetary policy operations.
At the same time, there’s a debate around the extent to which it’s appropriate for monetary policy to be redefined in order to join the fight against climate change. In its statement, the ECB said that the
volume of corporate bond purchases will “continue to be determined solely by monetary policy considerations and their role in achieving the ECB’s
inflation target.”
And policy makers were eager to show that the planned “tilt” in the ECB’s bond holdings will be a gradual process for the issuers affected.
“We want to give all those companies an incentive to become greener and therefore to make sure that over time they remain part of these portfolios,” Schnabel told reporters. She added that “climate change considerations cannot stand in the way of our monetary policy needs, so there is a clear hierarchy.”