LONDON (Reuters) – A rise in overnight borrowing rates for trades that use Italian government bonds as collateral suggests that some of the country’s banks may have started taking advantage of tiered ECB interest rates to make a profit.

Tiered rates are one of the measures the European Central Bank has introduced to ease pressure on banks’ margins caused by negative borrowing costs.

The system allows eligible banks a 0% interest rate on part of the reserves they hold at the ECB, rather than applying the deposit charge that equates to the bank’s base rate of -0.5%.

But the preferential facility is available only to lenders whose reserves are less than six times a mandatory amount calculated on the basis of their balance sheets.

ECB deposits from most euro zone countries’ banking systems already exceed this limit, but Italian lenders have the smallest combined excess reserves in the bloc, and moves on the money market suggest they have been benefiting.

Since tiering was implemented on Oct. 30, data from repo indices provider RepoFunds Rate shows rates on repo trades using Italian government bonds have risen as much as six basis points, standing at -0.44% on Tuesday.

Graphic: Italian GC repo rate png, here

“Some money is being raised on the repo market by holders of Italian bonds. The suspicion is (by) Italian banks, because they hold a lot of Italian bonds and also they are the ones… that have non-allocated allotment at the ECB at 0%,” said Antoine Bouvet, senior rates strategist at ING.

The arbitrage trade – essentially raising cheap cash at home and parking it cost-free with the ECB – will enhance the Italian banking system’s savings from tiered rates. Even without it, Italian banks could save around a combined 250 million euros ($276 million) from no longer having to pay a penalty to the ECB, according to calculations by Jefferies.

That should rise as they make use of the arbitrage, and they could increase the amount held at the ECB by 20 to 40 billion euros before becoming liable for the -0.50% deposit rate, analysts estimate.

“Any bank that has excess exemption thresholds should be keen to utilize those; no one can afford to leave 0% at the ECB without using it,” said Commerzbank’s head of rates and credit research Christoph Rieger.

He predicts banks could engage in some 100 billion euros of repo operations, sales of short-dated bonds or other funding operations to take advantage of the arbitrage.

On the flip side, the risk is that monetary conditions at home tighten or banks sell short-dated government bonds to raise cash in their rush for the 0% rate.

Possibly anticipating this, the euro zone money market curve shifted upwards after the ECB announced tiered rates in September.

But the ECB says it will set the multiplier on excess reserves in a way that short-term money market rates are not “unduly influenced”.

The bloc’s new overnight rate, ESTR EUROSTR=, has mostly held steady in the past week as the arbitrage is not available to the majority of euro zone banking systems.

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