BNP Paribas and Societe Generale swallowed a final raft of losses in Q4 2023 unwinding interest rate hedges tied to drawdowns from the European Central Bank’s targeted longer-term refinancing operations (TLTRO). The year-long clean-up exercise cost the dealers a combined €1.2 billion ($1.3 billion).
The two banks incurred losses of €47 million and €30 million, respectively, in the three months to end-December as they exited swaps that were meant to protect interest margins on loans financed through the ECB’s TLTRO programme but turned loss-making after the central bank tightened the cost of borrowing from the facility in November 2022.
The latest losses pushed the full-year cost of pruning the hedging book to €938 million at BNP Paribas and €330 million at SocGen.
The tally for BNP Paribas was notably heftier than originally forecast to investors, with Q1 2023 earnings material guiding for around €800 million of total losses to be absorbed within the first half of that year. SocGen, for its part, had warned investors of a loss of around €300 million for the full year.
Both banks maintained TLTRO balances as of end-December, of €24 billion at SocGen and €18 billion at BNP Paribas, down from €52.7 billion and €67 billion at end-2022.
What is it?
The TLTRO scheme, introduced in 2014, provides loans at favourable rates to “preserve favourable borrowing conditions for banks and stimulate bank lending to the real economy”.
Until November 2022, the interest rate applied on all outstanding TLTRO III operations was 50 basis points below the average rate applied on the ECB’s main refinancing operations. For banks reaching certain lending volumes, the interest rate would switch to 50bp below the deposit facility rate instead.
The TLTRO interest rate has since been indexed to the average applicable key ECB interest rates, eliminating the 50bp sweetener.
As it changed the scheme’s terms, the ECB also provided banks with optional early repayment dates. If held onto until maturity, the last TLTRO outstandings will be repaid in December 2024.
Why it matters
Over the span of less than 12 months across 2021 and 2022, policy-makers in Frankfurt shifted from a paradigm in which bank lending needed to be spurred with a subsidised wholesale facility, to one where unilateral changes to that same facility’s terms were fair game in order to mop up excess liquidity in the system.
Executives at BNP Paribas and SocGen cannot be faulted for being wrong-footed by such a shift. But the markdowns incurred on the TLTRO hedges look particularly ugly when some rival banks sidestepped the problem altogether by not hedging their drawdowns or, when they did, managed to digest the ensuing losses far quicker, as was the case for Rabobank and ING Bank.
Whatever the degree of culpability that may be attributed to executives, the next time a low interest rate policy starts draining interest income of momentum, they may tread more carefully in tying up their cashflows into longer-term swaps – lest a tightening of the ECB’s spigots marks a repeat of 2023.
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BNP Paribas, SocGen brace for more hits from TLTRO hedge unwinds
Rabobank LCR down 7% on TLTRO prepayments
BNP Paribas takes €403m hit unwinding TLTRO hedges
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