As of 2 October, the European Central Bank has started the publication of the €STR rate. This overnight index replaces the Eonia. Whereby the Eonia is now tracking the €STR. The rate is based on overnight transaction between financial institutions. Daily volumes are currently around the 30 billion (around 400 transactions). As of 2022 the Eonia rate will not be published any more. This means that financial institutions must switch to alternatives like the €STR.
Currently, a contract value of 20.000 billion Euros must be revised to comply with the new benchmark rates. According to a questionnaire of the AFM and DNB, most financial institutions have a project team to prepare for the benchmark changes. Most institutions identified the impact but are struggling with the uncertainty around the timing of the transition.
Read more about the challenges with the replacement of IBOR benchmark interest rates.
On 12 September, the European Central Bank (ECB) once again cut interest rates and revived the Quantitative Easing (QE). The measures, which faced opposition from DNB, are an attempt at reflating the euro-area economy. The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and will start to buy debt as of 1 November at a pace of 20 billion Euros a month. In contrast to the previous QE packages, this time there is no fixed end date. Instead, the ECB will continue for as long as necessary to hit its inflation goal.
To prevent a strong negative impact on banks’ profitability (and negative consumer savings rates), the ECB introduces a two-tier system exempting part of banks’ excess liquidity from negative rates. The exempt part, equal to six times the institutions’ minimum reserve requirements, will be subject to the deposit facility rate, which equals 0.0%. The new chairman of the EBF, however, would like to see banks charge negative rates for wealthy retail and commercial clients.
The European Central Bank should ‘gradually eliminate’ carbon assets, Christine Lagarde says. The ECB should phase out climate-warming investments by preferring green bonds, Lagarde said as she pitched to become the bank’s first female president. Lagarde was cautious not to make ‘premature commitments’ and pointed out that the ECB could not exclusively invest its 2.6 trillion Euros portfolio in green bonds “because there is not enough of a market”. As head of the IMF, Lagarde campaigned for greater disclosure of the risk climate change poses to the financial system.
On 22 September, Banks with more than 47 trillion Dollars in assets, or a third of the global industry, adopted new U.N.-backed “responsible banking” principles to fight climate change that would shift their loan books away from fossil fuels. Deutsche Bank, Citigroup and Barclays were among 130 banks to join the new framework on the eve of a United Nations summit in New York aimed at pushing companies and governments to act quickly to avert catastrophic global warming.
On 26 September, the Bank for International Settlements (BIS) has launched an open-ended fund for central bank investments in green bonds. Responding to a growing demand for climate-friendly investments among official institutions, the BIS’s green bond fund initiative helps central banks to incorporate environmental sustainability objectives in the management of their reserves.
The Swiss Financial Market Supervisory Authority FINMA has recognised a proposal made by the Swiss Bankers Association (SBA) as a binding minimum standard. FINMA has been drawing attention to the signs of overheating in residential investment property for some time. The rules will come into force as of 1 January 2020. The changes will tighten the requirements regarding the loan-to-value ratio and the amortisation of mortgage loans for investment properties.
Borrowers will be required to provide a minimum down payment of at least a quarter of the loan-to-value ratio, instead of the current ten percent. In addition, the mortgage is now to be amortised to two-thirds of the LTV-ratio of the property within a maximum of 10 years (currently 15 years). Owner-occupied residential properties are not affected by the adjustments and the tightened rules only apply to new borrowers.