LTRO vs. TLTRO: ECB’s Financial Operations to Help Eurozone Economy


In recent years, we heard about LTRO many times and lately it is all about TLTRO. During the March meeting, in fact, the European Central Bank had announced 4 TLTRO (starting in June), with rates from 0% to -0.40%.

But what is TLTRO and how it differs from LTRO?

In previous years the euro area has had to face an unprecedented economic crisis, which was reflected on the solvency of banks.

To face the emergency, when the spread (i.e. difference between BTP and BUND) was reaching troublesome levels, Mario Draghi calmed markets through the first important intervention, called LTRO.

The Long Term Refinancing Operation (LTRO) is the result of a set of loans that were made to the banks between 2011 and 2012 at the rate of 1%. This financial operation put in safety European banks and government bonds and it stabilized the markets by bringing down the spread.

In the Eurozone banking system it was placed about 1000 billion Euros. These funds, however, remained in bank’ storage and they were used mostly to buy government bonds in return.

With the Long Term Refinancing Operation plan (LTRO), the ECB carried out the auction which granted a three-year loan to banks that request it. In this case the yield was equal to the average rate on the main refinancing operations, calculated in the same period of the operation.

As collateral, the central bank received government bonds or even worthless assets. The list of assets used as collateral is published on the ECB’s website and it is updated several times in a month.

In September 2014, the European Central Bank (ECB) has implemented other long-term liquidity injections to support the economy through cheap auctions with a maturity of four years, the so-called targeted long term refinancing operation (TLTRO).

This operation differs from the LTRO because operations are “targeted”: the banks will receive capital with well-defined constraints and that capital must actually get in the hands of privates or companies, otherwise it will not be disbursed. Banks that do not meet all the conditions will be forced to repay the loans at a penalty rate.

This kind of financial transaction resembles the famous Quantitative Easing or QE implemented in the United States.

The novelty of the upcoming auctions will be, however, the interest rate (up to -0.40%). The rates will also be negative for those banks that lend more cash to privates and companies.

It is like the ECB would pay the banks to lend money to those subjects. In this sense, the ECB has set itself in a position to “give away” liquidity to banks.

In ECB stimulus super plan announced in March 2016, Mario Draghi has anticipated the start in June of new auctions that will be in operation for four years and will allow Eurozone banks to take on the costs to borrow money lower by the ECB.

The ECB has finally excluded from TLTRO housing mortgages in order to avoid the creation of yet another financial bubble.

The credit market in South Eurozone is troublesome and the economic crisis makes risky the loans for businesses and families compared to unprofitable market rates and unable to counterbalance the risks.

At this point, therefore, the new liquidity at such a low rate could be more of a chance than a solution.

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