EFTA Document EFTA01436180

Subject: ECB view - Euro banks topside play From: Martin Zeman Date: Wed, 23 Jan 2019 17:23:24 -0500 To: "Paul Barrett (S" ‹ > Cc: Stewart Oldfield Paul — research piece with some nice charts on the banks topic we talked about. https://research.db.com/Research/Article?rid=2f75ac9d-8fd7-40f4-a215- d9b93915e21b-604&kid=RP0001&documentType=R Page 16 -> How/when could the ECB adjust rates policy for the banking system? Our baseline view is that the start of the ECB policy tightening cycle will be delayed to March 2020 due to the current loss of cyclical economic momentum. However, delaying the tightening cycle for cyclical reasons opens the door wider to arguments for a non-cyclical rate adjustment in 2019. We think the ECB should take some type of policy action this year to support the structural profitability of the banking system — one could even make the inverted argument that a rate hike could ease bank-based financial conditions were it to be particularly positive for banking — the only question is how and when? If the ECB is becoming concerned about current economic conditions, March could be a 'live' Council meeting for an adjustment in the policy stance. March is the obvious time to announce details of the replacement for TLTR02. This presents an opportunity to consider the width of the standing facilities corridor. EFTA01436180 The ECB could adjust the deposit facilities rate upward, arguing for the structural benefit for banking, but use the TLTRO2 replacement to lean against a tightening of financial conditions 20. One challenge with this scenario is that it implies the ECB breaches its current forward guidance that all policy rates will remain on hold at least through summer 2019. For this scenario to materialise, either the ECB would have to signal before March the possibility of taking the deposit rate out of the rates guidance framework or argue after the event in March that it made sense for structural reasons to breach the guidance. Another scenario would have the ECB wait until the time-commitment element of the current rates forward guidance expires in September before hiking the deposit rate for structural reasons. Although this would not breach today's forward guidance, the reality is there seems little prospect of getting to September without the forward guidance being extended further. This means that if the ECB is to hike the deposit rate for structural rather than cyclical reasons it will at some point have to flag the possibility of breaching forward guidance. Introducing a tiering system as a way to reduce the costs of negative rates rather than raising the deposit rate has the benefit of not being constrained by the existing forward guidance on rates. The downside is its sheer complexity in terms EFTA01436181 of determining levels of exemptions, etc. {cid:[email protected]} Martin Zeman Director I Key Client Partners Deutsche Bank Wealth Management 345 Park Avenue, New York, 10154 office +1(212) 250-0432 mobile KCP products and services are intended for and available only to sophisticated, experienced investors who qualify as "institutional accounts" under FINRA Rule 4512(c)(3), and are capable of evaluating the investment benefits and risks of, and exercising independent judgment in evaluating and determining whether to enter into, sophisticated trading strategies and financial transactions. Transactions are subject to relevant internal approvals of Deutsche Bank or its affiliates prior to execution, and no transaction, idea or opportunity discussed herein may be executed unless you are a client of Deutsche Bank and of the Key Client Partners group (KCP). Material herein regarding KCP products, investment ideas and solutions is for discussion purposes only. While brokerage services offered through the KCP Americas desk may include investment recommendations and brokerage advice, KCP does not provide investment management or investment advisory services, and private market opportunities and other products and services available through KCP are offered only on a non-advisory basis. This communication is confidential and personal to you, solely for your information and for discussion purposes only, and does not create any legally binding obligation. Reproduction or distribution of any material herein without our written consent is strictly forbidden. This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. EFTA01436182 Please refer to https://db.com/disclosures for additional EU corporate and regulatory disclosures. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA01436183