Summary for the 6th of February 2019


Since 2011, the ECB has been supplying liquidity to the banks in the EU area through longterm refinancing operations. The first operations weren’t successful, much because of the financing terms weren’t attractive enough. The success came after the TLROII was introduced in March 2016.

TLROII has a four-year maturity, which means banks don’t have to pay back the loans for four years. The borrowing interest rate is the main interest rate in the ECB, which is 0%. If the borrowing bank manages to increase their balance sheet to an individual benchmark, it can receive interest instead of paying the interest, so-called negative interest or deposit facility rate, the current deposit facility rate is at -0.4%.

Banks that, prior to TLROII was introduced, had too strong growth in their balance sheets, the growth had to be subsided for them to be eligible for the negative rate. For banks that had declining balance sheets, the decline had to slow down if they would like to be eligible for the negative rate.

With four year maturity and a negative rate of -0.4%, the TLROII  has led banks to take large amount of loans from the ECB. The total outstanding of the TLTROII is 747 bn euro. 406 bn. euro of the amount was taken up in June 2016. Some of the amount has been paid back, but there is still 386 bn. euro outstanding from the first of the four tranches. This first tranche of the loan will be maturing in 2020, on June this year, the first tranche will no longer be considered stable funding for the banks according to NSFR. Unless ECB introduces a new refinancing operation, the banks will need to refinance these loans and acquiring capital directly from the financial marked.

Spanish and Italian banks are the top takers of these loans, as of now, the Italian banks have about 239 bn. euro loan from the ECB, while Spanish banks have around 167 bn. euro. French and German banks have about 114 and 89 bn. euro, respectively.

If the ECB doesn’t introduce a new refinancing operation, refinancing costs of banks will rise. The Italian and Spanish banks will be the most exposed to the rising cost, due to their high level of debt. This will in turn lead to higher financing costs for companies and consumers and lead to a slower growth in the overall economy.

At the last ECB meeting, Mario Draghi, the President of the ECB, said that the members of the board were all agreed about downward trend of the marked risks, but they had difference opinions about how long the slow growth in the EU economy would last. He also said that there wouldn’t  be changes in the monetary policy until the ECB had updated the inflation and growth objectives. In December the ECB had forecasted a GDP growth in the EU of 1.7% for 2019-2020 and core inflation of 1.4% this year and 1.6% next year.

Indices on 6th of February:
Dow: +0.7% (5th of February )
S&P 500: +0.5% (5th of February)
Nasdaq: +0.7% (5th of February)
Nikkei: +0.2% (6th  of February)
Chinese indices: Closed (6th  of February)
STOXX Europe 600 Index: +0.15% (6th  of February)

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