Thread by @jeuasommenulle

Obv I had questions on the various impacts of the ECB’s decisions on banks – so here’s a quick thread.

First, tiering.

The formula (6x multiple) should exempt 45%-50% of deposits at the ECB from the penal -50bps rate. So all in it’s a nice reduction of the (increased) cost.

But it’s very differently spread between banks and – more interestingly – between EZ countries. Here’s an estimate for a panel of big listed banks, sorted by countries

As you can see, bankers in Greece, Spain etc. are happy. France, less so.

The decision is also a bit schizophrenic: lower rates but tiering, WTF? Well, again, the key here is not the aggregate amount, but the split.

That's the M€ impact of both measures

So net/net the total impact looks like this – again very wide dispersion, % of estimated 2020 profits

Another thing not to underestimate: additional QE will create additional reserves – ofc. No one knows where they will end up but this will an additional drag on banks.

What this really means is that the deposit mechanics won’t move the needle much. Banks care much more about the yield curve: some care about Euribor, some about 10y, some about slope, some 2Y etc.

And the impact of the measures on those is hard to assess because what impacts market pricing the most is the *marginal* cost of depositing.

It used to be similar for all banks, now it’s going to be very different from one bank to the other based on their ALM policies.

So to be honest, I can’t really say what the impact on rates and on IG paper will be – the bid for <0 yield will be lower for sure, but how much lower?

And based on the price action of the Forward Euribor yesterday, I'm not the only one who doesn't know where this will end

But clearly the way bank treasurers adapt to this new framework will be key in future rates movement – and on bank profitability because of all those indexed products/embedded derivs.

Last but not least: sorry for the ugly charts.