Question about NAMA

jzkelly

if the irish government gives the banks nama bonds at 0.5% above the ecb rate, and the banks inturn borrow cash from the ecb at the ecb rate secured on these bonds, will the government be giving the banks 0.5% a year on top of the bonds that they will be given.

Économiste Monétaire

Banks don't borrow at that stated "ECB rate" (the minimum bid rate), that's a recent (and temporary) luxury. Before the crisis, banks entered an auction process where they submitted up to 10 bids at different, incrementally-increasing rates. At the end of the auction, you got the marginal rate, which is the lowest rate accepted, and the weighted-average rate, which is the average rate per Euro allocated in the auction. 'The ECB rate' is just the lowest rate you can enter in the auction. The spread you're talking about is likely to be tighter, especially when one considers how much they're borrowing from the central bank now, and you could also consider a rate rise in the period between a coupon rate reset (every six-months).

Banks don't have to use these bonds in ECB repos, though: pretty much any marketable security is eligible collateral—they're just given different discounts by the central bank based on their maturity profile and what liquidity class they're in. The new deposit guarantee should help the banks secure other (e.g. interbank) funding too.