ECB Insight: TLTROs More Likely to Be Extended Than Not, ECB Insiders Indicate

15 November, 2021

By David Barwick – FRANKFURT (Econostream) – A growing market perception that the European Central Bank is likely to continue offering targeted longer-term refinancing operations (TLTROs) on somewhat less advantageous terms in a post-pandemic world stands a decent chance of becoming reality, Econostream believes.

In an analyst research note on Monday, Barclays joined those arguing that TLTROs had ‘proved to be an important monetary policy transmission tool, supporting loans provision to the real economy.’

ECB Governing Council member François Villeroy de Galhau has made no secret of his own position, asserting a month ago that he was ‘in favour of maintaining this financing instrument in the future, in one form or another, as a safety net, also in order to avoid possible cliff effects related to future repayments.’

How much of an issue cliff effects are with respect to the TLTROs is less clear and a subject of discussion at the ECB. As Econostream has noted previously, there exists the view that since banks themselves choose when to repay the funds, there are no TLTRO-related cliff effects.

‘I see cliff effects also there, mainly in countries where these very favourable conditions mean TLTROs are a substantial source of income for the banks’, one Eurosystem insider, speaking on background, disagreed. ‘If they are relying too much, it is true that they can pay it back in advance, but if they do not, then of course there are cliff effects at the end.’

Another person was more guarded, arguing that whether banks’ repayment decisions were tantamount to a cliff depended on the ECB’s ‘being transparent and sufficiently predictable’ and thus ‘communicating clearly in advance what our intentions are with this instrument’.

For the first of those two people, however, cliff effects with respect to the TLTROs were not necessarily even a bad thing, but rather a potential part of the answer to the question of ‘to what extent we should force the banks to go back to market financing more and more’, as well as being less dangerous than cliff effects related to asset purchases.

‘At some stage it would be good to have some, because there is a lot of financing on the market, the financing conditions are good, so why should banks rely so heavily on central bank financing?’, this person reasoned. ‘So from that perspective, I’m more in favour of allowing a bit more cliff effects on the TLTRO side than on the asset purchase side.’

Without exception, all those Econostream spoke to were at least open to the idea of continuing to rely on the instrument, including the person willing to tolerate some TLTRO-associated cliff effects, who said that for him, endorsement of a TLTRO extension ‘depends only on the conditions.’

‘At this stage, with such good market conditions also, there is no need to provide such extraordinarily favourable terms, but definitely the TLTRO is also a monetary policy tool, so from that perspective I think it has its place in the toolkit of the central bank’, he said.

Another person said he would sooner support ‘putting too much liquidity in the market’. Although liquidity and bank term funding were not currently issues, it would be reasonable under present circumstances to ‘err on the side of being too generous’ and pay the currently low cost of ensuring they did not become issues, he reasoned.

This person as well wanted to sharpen the conditions, however, saying that ‘of course it makes sense to rethink the incentives’.

Although ECB President Christine Lagarde has indicated that the ECB’s collateral rules would be up for discussion in December, and these affect participation in the TLTROs, there is no indication that a decision about TLTROs themselves would be forthcoming a month from now.

Rather, with TLTROs set to continue in any case until next June, this issue could easily find itself on the back burner at the next Council meeting, also given the desirability of first clarifying what one person Econostream spoke to characterised as a ‘major question’ awaiting an answer, namely ‘to what extent are the TLTROs a subsidy and to what extent are they monetary policy?’

That the ECB is happy with its TLTROs is clear. In its sixth economic bulletin of 2021, released in September, the ECB reported ‘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.’

TLTROs, the ECB enthused, are ‘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.’

Given the likelihood of remaining in the neighbourhood of the effective lower bound for some time, and of elevated uncertainty persisting beyond next June, as of today it is markedly easier to imagine an extension of the TLTROs than that the ECB would abandon a tool that monetary policymakers across the spectrum appear comfortable with.