ECB Pays European Banks 1% To Give Them €174 Billion

Today was one of those iconic days that defines the new centrally-planned paranormal, whereas a result of such monetary abortions as negative rates, the ECB pays European banks to give them money. We are talking of course about TLTRO day when the ECB lends to banks at rates as low as -1% to try to encourage them to lend to households which are about to be locked down again, and the last thing they want is more debt.

And so, after €1.3 trillion was the taken-up last time three months ago, today Euro-zone banks took up just €174.5 billion, or $203 billion, in the latest TLTRO even as the ECB gave banks every possible incentive to keep lending to the pandemic-stricken economy, including rates as low as -1%. In other words, the ECB is paying banks to take cash which they should then lend out, at least in theory. According to Bloomberg, this suggests that "most lenders now consider themselves well-financed."

The latest facility brings the total TLTRO amount outstanding to €1.75 trillion...

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... and was priced at -1% for Year 1, and -0.5% for Years 2-3. As such these loans fully compensate banks for the official policy rate of minus 0.5%, which works as a charge on their reserves and erodes their profitability. Without TLTROs as a counterbalance, that could eventually curb lending. Instead, the ECB is effectively paying banks to lend. On the other hand, with the ECB almost fully offsetting the punitive effects of negative deposit rates, one wonders why the ECB still pretends to have NIRP?

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The TLTRO3 bids came from 388 banks, and the takeup was at the high end of economists’ expectations, if well below the June TLTRO. The high participation and ample usage confirms that there is still no stigma associated with use of the facility (that may change).

A couple of observations from Goldman:

  1. Overall, this is a moderate level of take-up, compared to the previous (June) auction of €1.3 tn by 742 banks, and total amount of ECB funding outstanding (€1.75 tn);
  2. The net new addition of liquidity to the system is around €158 bn, as some €17 bn was repaid / rolled-off. This brings total ECB funding usage to a new record of €1.75 tn. By way of context, during the 2008/9 GFC usage was <€1 tn, while the 2011/12 sovereign crisis saw usage rise to €1.26 tn.
  3. Further capacity exists. On current collateral terms, this facility could still be scaled up further over the coming auctions.

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