Blog Post

Fact: T.L.T.R.O. is Too Low To Resuscitate Optimism

Yesterday the ECB held the first auction of liquidity under its new TLTRO programme. The take up was well below expectations, raising questions about the actual ability of the ECB to regain control of its balance sheet.

By: Date: September 19, 2014 Topic: European Macroeconomics & Governance

Yesterday the ECB held the first auction of liquidity under its new TLTRO programme. The take up was well below expectations, raising questions about the actual ability of the ECB to regain control of its balance sheet.

It’s the third week of September and the sky is already getting quite grey, over Frankfurt. The ECB held yesterday the first allotment of liquidity under its new TLTRO programme. It was introduced in June and it foresees two initial auctions (September and December 2014) in which banks will be able to borrow up to an initial allowance of roughly 400bn plus a number of additional leveraging operations.

Expectations on the take up in the first operation were high. A Bloomberg poll this week showed that analysts, on average, expected banks to bid for €174bn of loans in September and €167bn in a second auction in December. The actual amount allotted, however, was only 82.6 billion, i.e. less than half the average expectation for this first operation.

Actual amount allotted was only 82.6 billion, less than half of the expected for this first TLTRO operation

Results at the country level are not known in full yet, but sparse news suggest that around 46% of the total went to Spanish and Italian banks (Figure 1) . Reuters reports that ten Italian banks, including Italy’s top three lenders Intesa Sanpaolo, UniCredit and Monte dei Paschi di Siena, took a combined 23 billion euros. This represents 28 percent of the total 82.6 billion allotted, and about 30% of Italian banks’ potential allotment (of 75 billion). El Mundo reports that Banco Santander, BBVA, Caixabank, Banco Popular and Bankia took in total 15 billion, whereas Banco Sabadell and Bankinter did not participate. This represents 18 percent of the total and about 28% of Spanish banks’ initial allowance. Bloomberg reports that Amsterdam-based ING Groep NV and ABN Amro Bank NV said they subscribed for funds (but did not disclose the amount), whereas Austria’s three largest banks, Erste Group Bank AG, UniCredit Bank Austria AG and Raiffeisen Bank International AG, didn’t take part.

In light of this outcome, a number of questions forcefully ask to be answered.

First, why was the take up so low compared to expectations? Quite obviously, it is not a matter of price. The interest rate has never been so low. Actually, Mario Draghi himself stressed during the last press conference that the cut in the interest rate was also meant to signal “ to the banks that are going to participate in the TLTRO that they should not expect any further lowering in interest rate, so they should not hesitate to participate in the TLTRO because of this reason, because they could wait for a lower interest rate in the future.”

Rather than using very cheap liquidity, euro area banks are actually reimbursing it

It may be, as many suggest, that banks may just prefer to wait for the end of the ECB’s comprehensive assessment of bank balance sheets, before taking up more ECB liquidity. If this were a correct interpretation, take up in the December TLTRO should be significantly higher. The “stigma” argument was a powerful one at the height of the crisis, when there existed a liquidity emergency in some part of the euro area banking system and therefore borrowing at the ECB facility could have a bad signalling effect. But the current situation is very different and the “liquidity emergency” (with its implications) is an old memory. Not to mention that the ECB assessment is almost complete (and run on balance sheet data of end-2013), so it’s not obvious how borrowing now could affect the results.

The real reason may actually be more of a thorn in the side for the ECB. While it is true that interest rates are at record low, banks in the euro area have had the possibility to borrow very cheap liquidity for years, by now. But rather than using it, they are actually reimbursing it. Figure 2 below shows the evolution of excess liquidity outstanding in the euro area together with what appears to be the main factor behind its shrinkage: anticipated repayments by banks of the funds they borrowed at the ECB under the previous LTRO. Banks have been repaying ECB liquidity since february 2013. Interestingly enough, between June (when Draghi announced the TLTRO) and now, repayments have accelerated, probably with the objective to “swap” the repaid LTRO funds for TLTRO ones.

There is not an exogenous shortage of cheap liquidity in the euro area right now. But in the South of the euro area – where non-performing loans are high – banks would need to discount high expected default rates (and relative provisions). Moreover, lending to SMEs implies high risk weights and, consequently, capital charge. The profitability of borrowing very cheaply at the ECB to lend to the private sector (especially SMEs) is therefore not guaranteed, and the incentive of banks to take part in the TLTRO is not guaranteed either.

This however raises important and uncomfortable questions for Frankfurt, about the actual ability to deliver on the commitments recently taken in the fight against low inflation. During the last press conference, Mario Draghi in fact said that the aim of the ECB’s measures is to bring the size of the balance sheet back to the level it had in mid-2012.

From that peak (3 trillion) the ECB’s balance sheet has shrunk by about 35%, mostly due to the aforementioned reimbursement of LTRO funds. Bringing it back would require a boost of about 1 trillion.

Bringing the ECB balance sheet back to peak would require a boost of about 1 trillion

Speaking with Bloomberg, vice-president Constancio said that “within the whole package of measures that we have taken, in terms of the effect they can have on our monetary base, the bulk will come from the targeted longer-term refinancing operations”, which isn’t surprising in light of both the reduced size of the ABS market in Europe and the difficulties that the ECB is facing in its attempts to broaden the range of instruments it could buy.

But is it realistic? Figure 2 shows that the 400 billion available for the first two TLTRO operations are barely enough to cover the reimbursement of the outstanding 372 billion of old LTROs. This means that the net effect of these two initial operations on the ECB balance sheet will be a small additional 28 billion. Therefore, even assuming full take up in the December operation, the participation to the second phase of the TLTRO – which is based on banks meeting certain net lending benchmarks – looks crucial for the scheme to be sizable. And as far as this is concerned, we already pointed out that one important issue is still pending, i.e how banks will be prevented from using the funds borrowed now and in December for purposes different from lending.

There are a number of factors possibly playing a role in the low take up of this TLTRO operation. In addition to those already mentioned, the ECB itself might have modified the reaction function of banks, with its announcement of an ABS programme. Knowing that the ECB is going to buy ABS starting soon, and knowing that  – at least for the moment – the ECB is unlikely to buy ABS that it would not accept as collateral, banks might prefer to wait and sell those ABS to the ECB rather than just pledge them now.

T.L.T.R.O. may soon become famous as an acronym for “Too Low To Resuscitate Optimism”

Certainly, we need to wait until December to have a clearer view on the matter. But there is something that can and should be pointed out already. These results show yet one more time the risk of doing a “(not so) unconventional” monetary policy à la ECB: it is ultimately outside the central bank’s control, because it is driven by banks’ demand. Regaining control of the balance sheet with measures that are less demand-driven is a prerequisite to make an impact, but if the ECB’s great expectations are predominantly put on the refinancing operations, this might not happen. And the T.L.T.R.O. may soon become famous as an acronym for “Too Low To Resuscitate Optimism”.


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 about event

Past Event

Past Event

Climate change and the role of central banks

What connections exist between central banks and climate change, and what are the resulting implications?

Speakers: Emanuele Campiglio, Paul Hiebert, Pierre Monnin, Kjell G. Nyborg, Luiz Awazu Pereira da Silva, Mario Quagliariello, Mattia Romani, Paweł Samecki and Dirk Schoenmaker Topic: Energy & Climate, European Macroeconomics & Governance Location: Narodowy Bank Polski, Świętokrzyska 11/21, 00-919 Warsaw Date: September 16, 2019
Read article More on this topic More by this author

Opinion

Germany’s Divided Soul

Eastern Germans vote, think, and feel differently than western Germans do, as the results of the September 1 regional elections make clear. To help tackle the underlying economic causes of this divide, the federal government should introduce incentives to encourage foreign investment in the east of the country.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: September 13, 2019
Read article Download PDF

Policy Contribution

European Parliament

Hybrid and cybersecurity threats and the European Union’s financial system

The authors document the rise in hybrid threats and cyber attacks in the European Union. Exploring preparations to increase the resilience of the financial system they find that at the individual institutional level, significant measures have been taken, but the EU finance ministers should advance a broader political discussion on the integration of the EU security architecture applicable to the financial system.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: September 12, 2019
Read article More on this topic More by this author

Opinion

Economic priorities for new EU leadership

Europe is no longer in crisis mode. However, it remains vulnerable; it is unprepared and it is procrastinating. Following European elections this May, new leaders are about to take their positions at the main European institutions for the next 5 years. They have the power in their hands to take action. But more importantly, they have the power to convene 28 states, which, if united, can play a significant global role. What are the urgent challenges that require collective European action?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: September 10, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Enhancing Europe's economic sovereignty

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Jean Pisani-Ferry on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Priorities for Europe's monetary union

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Zsolt Darvas on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Which priorities for the new EU leadership?

Backstage at the Bruegel Annual Meetings, Rebecca Christie talks with Guntram Wolff on priorities for the new EU leadership, the Annual Meetings and Commissioner Malmstrom's keynote.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 4, 2019
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2019

Bruegel's 2019 Annual Meetings will be held on 4-5 September and feature the launch of Bruegel's Memos to the New European Commission.

Speakers: Lorenzo Bini Smaghi, Georg Boettcher, Laurence Boone, Niels Brab, Claire Bury, Grégory Claeys, Vítor Constâncio, Zsolt Darvas, Kris Dekeyser, Jérôme Delpech, Maria Demertzis, Baroness Kishwer Falkner of Margravine, Ambroise Fayolle, Alicia García-Herrero, Mikaela Gavas, Sven Giegold, José Manuel González-Páramo, Pierre Heilbronn, Mathew Heim, Jamie Heywood, Yi Huang, Danuta Hübner, Korbinian Ibel, Shada Islam, Kate Kalutkiewicz, Brigitte Knopf, Jörg Kukies, Bernd Lange, Päivi Leino-Sandberg, Mark Leonard, Cecilia Malmström, Stefano Manservisi, J. Scott Marcus, Ann Mettler, Ashoka Mody, Reza Moghadam, Erik F. Nielsen, Jean Pisani-Ferry, Lapo Pistelli, Lucrezia Reichlin, Joakim Reiter, Victoria Roig, André Sapir, Harriet Sena Siaw-Boateng, Maria Spyraki, Philipp Steinberg, Matina Stevis-Gridneff, Alexander Stubb, Simone Tagliapietra, Jean-Claude Trichet, Laura Tyson, Nicolas Véron, Koen Vervaeke, Reinhilde Veugelers, Jasper Wesseling, Sabine Weyand, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Palais des Academies, Rue Ducale 1, 1000 Brussels Date: September 4, 2019
Read article Download PDF

Book/Special report

Braver, greener, fairer: Memos to the EU leadership 2019-2024

This collected volume, edited by Maria Demertzis and Guntram Wolff, focusing on the most important economic questions at EU level. The memos covering 16 different files and written by 21 Bruegel scholars, are intended to present the strategic to-do list based on an assessment of the state of affairs and the challenges that will greet the new Commissioners.

By: Maria Demertzis and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Dousing the Sovereignty Wildfire

In time, the current spat between French President Emmanuel Macron and his Brazilian counterpart Jair Bolsonaro regarding the Amazon rainforest may become a mere footnote. But other rows between collective and national interests are sure to erupt, and the world needs to find a way to manage them.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Retraites : pour la clarté

L’économiste regrette, dans sa chronique au "Monde", que les tensions internes au gouvernement aient conduit à s’écarter de la stricte logique d’un système par points.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Why Europe needs a change of mind-set to fend off the risks of recession

Recession! This is the new worry in Europe and the US. A simple look at google trends shows that in Germany, France and the US, search interest for recession peaked in the last weeks. In Italy, the peak already occurred end of January. Whether a recession is actually occurring is difficult to gauge in real time. But there can be no doubt that significant risks such as the trade war and no-deal Brexit exist.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 2, 2019
Load more posts