ECB: No Evidence of Substantial Side Effects from TLTROs So Far

20 September 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s targeted longer-term refinancing operations (TLTROs) have not had significant side effects yet, the ECB said on Monday.

In a pre-release from the sixth economic bulletin of the year, due out Thursday, the ECB said that ‘[t]here is no evidence of substantial side effects or dilution of the stimulus coming from TLTROs so far, with the programme interacting positively with the broader policy package.’

On the contrary, the TLTROs make it possible for banks to reduce their lending rates without compromising lending margins or taking on excessive credit risk, the ECB said. This was especially important early in the pandemic, when corporate borrowers needed emergency liquidity in large quantities, it said.

The ECB cited evidence showing that the TLTROs’ design made sure that the stimulative effect of the policy instrument ‘reached households and firms as intended, without being excessively diluted by unwarranted uses of funds such as lending to governments.’

Overall, the report painted a positive picture of the TLTROs ‘as a central bulwark against the impairment of the bank-based transmission mechanism of monetary policy in a context of unprecedented financial stress for the euro area banking system.’

TLTROs had supported favourable financing conditions throughout the pandemic and, given the lag associated with the reliance on banks, would continue to do so, according to the ECB; ‘the overall impact of TLTROs has not yet fully materialised’, it said.

The ECB called TLTROs ‘an effective and flexible tool of monetary policy accommodation in the vicinity of the effective lower bound, especially in an environment characterised by a high level of uncertainty.’

The targeted nature of the operations is an essential aspect that motivates bank lending, the ECB said. The fact that participating banks can do better than the deposit facility rate enables the further easing of funding conditions despite negative interest rates and possibly strained access by banks to market-based funding, the ECB said.

‘Moreover, the close link with the deposit facility rate has allowed the negative interest rate policy to continue spurring loan origination, even as deposit rates fell further’, it added.