Blog Post

TLTRO spoils Christmas holidays at the ECB

It’s beginning to look a lot like Christmas, but it does not look like Santa Claus has any intention to stop by Frankfurt. Today, the ECB revealed the outcome of the second Targeted Longer Term Refinancing Operation (TLTRO) auction, which definitely were not good enough to ease pressure on the Central Bank to act.

By: Date: December 15, 2014 Finance & Financial Regulation Tags & Topics

It’s beginning to look a lot like Christmas, but it does not look like Santa Claus has any intention to stop by Frankfurt. Yesterday, the ECB revealed the outcome of the second Targeted Longer Term Refinancing Operation (TLTRO) auction, which definitely were not good enough to ease pressure on the Central Bank to act.

As previously discussed, the TLTRO potential initial amount for the first two operations was in the order of 400 billion, i.e. 7% of the outstanding banks’ loans to non-financial private sector borrowers, excluding mortgages as of 30th April 2014. Take-up of the first TLTRO in September was low, at 82.6 billion, leaving a potential available 317 billion for banks to borrow in the second round.

The final figure came in at bit less than 130 billion, bringing the total take up to 212 billion, i.e. slightly more than half the potential total amount, and the number of participating banks increased but only slightly (from 255 to 306). To put things in perspective, the total allocated between the two operations is less than the 270 billion of previously-borrowed LTRO funds that banks have reimbursed before maturity since the beginning of this year alone (not to mention the 720 billion reimbursed since the possibility of early reimbursements was introduced, in 2013).

Moreover, repayments of previously borrowed LTRO funds had increased considerably after the first September auction, signalling that banks had basically used the TLTRO to swap part of the LTRO into new 3y liquidity (something that could easily happen this time as well).

Excess liquidity in the euro area is shrinking to record low levels

As a result, excess liquidity in the euro area is shrinking to record low levels (figure 2), and the effect of the weapon on which the ECB had pledged a non-negligible portion of its reputational capital look tiny (at best). True, this is not the final act of the TLTRO saga. Between March 2015 and June 2016, in fact, banks will be able to borrow additional amounts in a series of TLTROs conducted quarterly and depending on banks’ net lending, with the reference point being 30th April 2014. But there are uncertainties about banks’ appetite for leveraging these funds as well as more generally about the effect of this measure on actual lending to the real economy.

Note: excess liquidity is computed following the ECB definition as deposit facility net of the use of marginal lending facility plus current account in excess of the minimum reserve requirement

 

The ECB said at the last meeting that it "intended" to bring its balance sheet back to the levels it held in early 2012, which would imply a 1 trillion increase. Yesterday’s results are not bringing the ECB any closer to that and if anything, they show that banks instead do not "intend" to help much, at least not by taking up much additional liquidity. As a consequence, ECB’s balance sheet has in fact not grown since the first round the TLTRO, despite ongoing purchases of covered bonds and (disappointing) purchases of ABS.

At the last meeting the ECB said that it intended to bring its balance sheet back to 2012 levels. This would imply a 1 trillion increase

In the meantime, risks to price stability are increasing further. The price of oil slided to 65$ per barrel (which is even below the “shock” assumption in the ECB’s sensitivity analysis of inflation forecasts for 2015). CPI inflation for Germany was confirmed at +0.6% for November 2014 – with a lower rate of price increase than the one recorded in November 2014 dating back to 2010. And in France, HICP inflation was -0.2% compared to November and +0.4% only year on year. But most importantly, French core inflation turned into the negative territory for the first time since the indicator has been measured (i.e. since 1990). And if this does not convey the urgency of the situation, it’s hard to imagine what could.

Read more:

Central bank rates deep in shadow

The ECB winter of discontent

The ECB’s balance sheet, if needed


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More on this topic

Policy Contribution

PC 17 04

Brexit and the European financial system

Brexit will lead to a partial migration of financial firms from London to the EU27. This Policy Contribution provides a comparison between London and four major cities that will host most of the new EU27 wholesale market: Frankfurt, Paris, Dublin and Amsterdam. It gives a detailed picture of the wholesale markets, the largest players in these markets and the underlying clearing infrastructure. It also provides data on professional services and innovation.

By: Uuriintuya Batsaikhan, Robert Kalcik and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: February 9, 2017
Read article Download PDF More on this topic

Policy Brief

PB 17 01

Making the best of Brexit for the EU27 financial system

The EU27 needs to upgrade its financial surveillance architecture to minimise the financial market fragmentation resulting from Brexit and the corresponding increase in borrowing costs for firms.

By: André Sapir, Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: February 8, 2017
Read article More on this topic

Blog Post

MariaDemertzis1 bw
sd-12177-_0028bea2-web

Bruegel conference discusses strategies to tackle Europe’s NPL crisis

Bad loans and private sector debt distress are widely acknowledged to hold back investment and growth in Europe. It was good, then, to hear ECB Vice-President Vítor Constâncio call for a comprehensive strategy to address the non-performing loans problem at an event hosted by Bruegel last week.

By: Maria Demertzis and Alexander Lehmann Topic: Finance & Financial Regulation Date: February 7, 2017
Read article More on this topic More by this author

Opinion

Alicia García-Herrero

China banks in 2017: No rebound in sight, rising risks for smaller banks

Alicia García-Herrero finds it unlikely that risk in the Chinese banking sector will abate any time soon. And the worries are strongest for smaller institutions. However, the chances of a total crisis are low, and proactive decisions now could pay dividends in the medium term.

By: Alicia García-Herrero Topic: Finance & Financial Regulation Date: February 6, 2017
Read article More by this author

Blog Post

ECB Board Members - Benoît Cœuré, Mario Draghi, Peter Praet, Sabine Lautenschlaeger, Vitor Constancio, Yves Mersch

Resolving Europe’s NPL burden: challenges and benefits

Keynote speech by Vítor Constâncio, Vice-President of the ECB, at Bruegel event: "Tackling Europe's non-performing loans crisis: restructuring debt, reviving growth", Brussels, 3 February 2017

By: Vítor Constâncio Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: February 3, 2017
Read about event

Past Event

Past Event

Tackling Europe’s non-performing loans crisis: restructuring debt, reviving growth

How can we connect the different initiatives for NPL resolution and identify an agenda that is shared between EU, national authorities and the private sector.

Speakers: Corso Bavagnoli, Iker Beraza, Arne Berggren, John Berrigan, Marco Buti, Vítor Constâncio, John Davison, Maria Demertzis, Sharon Donnery, Inês Drumond, Giorgio Gobbi, Piers Haben, Boštjan Jazbec, Gert-Jan Koopman, Alexander Lehmann, TJ Lim, Brendan McDonagh, Reza Moghadam, Ajay Rawal, Emanuele Rosetti Zannoni, Dirk Schoenmaker, Carola Schuler, Julien Wallen, Thomas Wieser and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 3, 2017
Read article More by this author

Blog Post

Silvia Merler

Climate change and financial markets

What’s at stake: Ever since the 2016 Paris Agreement to reduce emissions was signed, researchers have been looking at the impact that moves towards a low-carbon economy might have on financial markets and financial stability. We review these contributions here. 

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: January 30, 2017
Read article More on this topic More by this author

Blog Post

sd-12177-_0028bea2-web

Will better insolvency standards help Europe’s debt deleveraging?

Insolvency regimes in the euro area are on the whole costly, lengthy, and recover little value. A new directive proposed by the Commission sensibly aims to strengthen preventive restructuring and to give once-failed entrepreneurs a second chance. But to assist banks in their NPL workout judicial capacity will need to be built up, and regimes better tailored to SMEs will be necessary.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: January 23, 2017
Read about event More on this topic

Past Event

Past Event

Debt restructuring through better insolvency standards

What potential to revive European enterprises?

Speakers: Catherine Bridge Zoller, Philip Hertz, Alexander Lehmann, Sarah Paterson and Andreas Stein Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 18, 2017
Read about event More on this topic

Past Event

Past Event

The outlook for European financial centres

This event organised jointly by Bruegel, the Malta Financial Services Authority, and the Maltese Ministry for Finance will discuss the outlook for European Financial Centres.

Speakers: J V Bannister, Juanita Bencini, J Portelli, Georg Ringe, Nicolas Véron and William Wright Topic: Finance & Financial Regulation Location: The Xara Lodge, Rabat, Malta Date: January 16, 2017
Read article More on this topic More by this author

Opinion

Nicolas Véron

Giving Asia its due in global financial regulation

With US inward turn, China should get a bigger role to bolster system

By: Nicolas Véron Topic: Finance & Financial Regulation Date: January 5, 2017
Read article More on this topic More by this author

Opinion

Nicolas Véron

ECB finally addressing Italian bank woes

Italy’s banking problem has been left unaddressed for too long. Similar to Japan in the 1990s, it is best understood as a combination of structural and cyclical factors.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: January 4, 2017
Load more posts