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ECB policy decision reaction


Reacting to the latest policy decision from the ECB which has left rates and QE stimulus unchanged, Viktor Nossek, (pictured) Director of Research at WisdomTree Europe says: “The problem is not liquidity, there is plenty of it. Eurozone banks have EUR 870 billion in excess liquidity, EUR 318 billion of which is parked at the ECB deposit facility, a post-2012 peak. 

Nossek believes that bank capital ratios are the real problem. “Sustaining loan growth requires sufficient capital buffers, the latter which has been severely reduced as a result of the bank stock rout this year. Italian banks are one of the worst hit with average common equity Tier 1 (CET1) ratios of 11.9 per cent, below the Eurozone average. Some require state-aid to recapitalise as Italy’s bailout fund Atlas is insufficiently funded and is subject to the bail-in-rule.”
However, he believes that because Italian retail investors hold an estimated EUR 200 billion in bank bonds, it has become a political problem too. “The only way to replenish capital credibly through secondary equity issuances is if Italian banks can write off NPLs without materially impacting Italian retail investors which hold as estimated EUR 200 billion in bank bonds,” he writes.
“Draghi has also suggested the potential development of a fully functioning market for NPLs, along with a ‘public backstop’ to support banks under exceptional circumstances. Such measures will no doubt require some sort of compromise agreement needing to be struck as well as flexibility on the part of the European Commission (i.e. Angela Merkel). This is outside the scope of the ECB and can only be achieved through concerted pressure by EU members. We are seeing France teaming up with Italy to leverage themselves against Germany.”

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