ECB: Two possible and contradictory objectives regarding euro-zone banks

The ECB visibly wants to encourage banks to lend more. This is its first objective, leading it to put in place: Very low medium- and long-term interest rates to boost demand for credit; An incentive (a bonus clause) in very-long-term repos (TLTROs) to lend more; A p enalt y on excess reserves (now remunerated at -0.40%) over required reserves (now remunerated at 0%). But if the ECB had another objective (a second objective), namely to lift banks’ profitability in order to prevent their weakening from leading to a contraction in credit supply, it would have to conduct a different interest rate policy: Higher medium- and long-term interest rates to increase interest rate margins on loans; Less negative rates on deposits at the ECB (currently -0.40%); TLTROs at negative rates open to all banks, including struggling banks whose stock of loans is not increasing. By encourag ing euro-zone banks to lend, the ECB is taking the risk of further weakening them.