Banks made good money on the ECB’s so-called TLTRO loans (Details here). Borrow cheap and then park straight away at the ECB as a deposit. Now it seems that the TLTRO tool will also be used in the fight against inflation, making it unattractive for banks, which is why they will pay back loans – thus withdrawing liquidity from the financial market. For example, the ECB will receive hundreds of billions of euros in early repayments of these long-term economic loans from eurozone banks by the end of this year.
The ECB has tightened the terms of its TLTRO liquidity program to help in its fight against inflation. This month, according to Bloomberg, repayments of these “targeted long-term refinancing operations” (TLTROs) are possible for the first time. Estimates differ widely on how much of the €2.1 trillion in outstanding funds will roll back in November. In a Bloomberg poll of economists, the spectrum ranged from €200 billion to €1.5 trillion. The median of the estimates was €600 billion. For December it was 285 billion euros. Banks have until Wednesday to notify the ECB whether they intend to repay this month.
Battling record inflation, the ECB last month adjusted the terms of its TLTRO lending program to ensure it was compatible with its increasingly tighter monetary policy stance. In the pandemic crisis, TLTROs had helped banks with liquidity. The now amended terms eliminated an arbitrage opportunity that allowed lenders to park money in ECB depositories for risk-free income. Results for the first redemption opportunity will be released on Friday.
“There has always been a lot of uncertainty in predicting TLTRO repayments,” explains Piet Christiansen, chief strategist at Danske Bank. “This time is no different. The new terms need to be balanced with year-end liquidity patterns and regulatory factors.”
Analysts expect more than €1.6 trillion of TLTRO loans to be repaid by the end of the second quarter. Early repayments this year could have a direct impact on the ECB’s monetary policy stance, notes ING’s Carsten Brzeski. “Balance sheet liquidation (including QT) would become a substitute for rate hikes in 2023,” the economist said.
FMW/Bloomberg
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