ECB Creates €8 Billion in Cheap Funding for Irish SME’s

I am very concerned about the lack of credit available to SME’s at this stage in our recovery. There is one upcoming opportunity that has the potential to create up to €8Bn of cheap funding for Irish SME’s, but only if the Irish banks get  both fully on board with the scheme and are also transparent about it’s operation.

In June the European Central Bank announced the creation of a Targeted Long Term Refinance Operation (TLTRO), this is worth approximately €400Bn in the first phase of this operation. This essentially represents cheap funding for banks with the specific intention that it is advanced as credit to Businesses (excl. financial intermediaries & mortgages) and Consumers (excl mortgages). It appears that Ireland’s share of this fund will be approximately €8Bn.

In relation to this actually becoming credit for Irish SME’s there are a few related issues that need to be monitored:

1) The rate banks can borrow at is the European Central Bank (ECB) Refinance Rate (currently 0.15%) + 10 bps, so all in 0.25% financing for the banks. If this money is loaned on to business then it should not be at a rate that creates excess profit. (e.g. if the bank charges 4.75% on the loan then they make 4.5% profit!)

2) There is a risk that Irish banks simply do not access the TLTRO and therefore forego an opportunity to increase business credit (they must apply by early September for the first tranche with a second opportunity to apply in December). Banks should reveal how much of the TLTRO they are entitled to (7% of their existing qualifying loan book) and more to the point how much of their entitlement they have applied for.

3) There is growing talk that many European banks will use this funding for ‘carry trade’ purposes, i.e. draw it down at 0.25% and use it to purchase govt bonds at a higher yields, thus earning a healthy risk free profit, this could technically occur if a bank claims there are no suitable lending opportunities at the present time. Irish banks need to be transparent to exactly what uses they have put their TLTRO draw down.

4) There does not appear to be any stipulation from the European Central Bank about how the lending needs to be split between consumers and business, nor is there anything relating to the size of the business that qualify.  There is an opportunity to for banks to ensure that a substantial proportion of the credit is extended directly to the SME sector.