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Eurozone banks in funding difficulty

posted onOctober 24, 2018

Eurozone lenders are looking to the European Central Bank (ECB) for help, as they "are facing a cliff edge for their funding", Bloomberg reported on Wednesday.

According to the news agency, around 722 billion euros ($832 billion) of  four-year loans granted to eurozone lenders by the Frankfurt-based institution will start maturing from 2020, but new regulatory standards mean replacement funds could be needed as soon as 2019.

Some banks have been in contact with the ECB to discuss the risk of letting those loans -known as Targeted Longer Term Refinancing Operations (TLTROs)- expire without affordable alternatives being in place, Bloomberg said citing people with knowledge on the matter.

The ECB first announced its cheap TLTROs  in summer 2014, and operations started in September 2014. TLTROs  were intended to offer long-term funding at attractive conditions to banks in order to further ease private sector credit conditions and stimulate bank lending to the real economy. 

Under the first version of the programme, banks could borrow an initial allowance of 7% of their outstanding loans to the eurozone non-financial private sector. The second version (TLTRO-II) was announced in March 2016.


Under TLTRO-II, banks could borrow up to 30% of the amount of their existing stock of loans to nonfinancial corporations and households (excluding loans to households for house purchase). Moreover, banks were given the opportunity to repay funds borrowed under TLTRO-I early and switch to TLTRO-II funds.

Early repayments for the first series of TLTROs fell due in 2016 and most of those loans were rolled over into the second series, according to analysts.

“The repayment deadlines mean the region’s massive excess liquidity will start contracting, putting upward pressure on market rates -- unless the ECB starts a new round of funding” Bloomberg wrote.
The topic of TLTRO maturity was discussed on Sept. 25 by the Money Market Contact Group (MMCG) at the ECB. The summary of the meeting, published Monday, said:

“The implications of the maturing TLTRO amounts differed across countries: countries with larger participation were expected to be more affected by higher costs of market funding to replace the attractively-priced TLTRO funds. In addition to pricing considerations, market access was also seen as an important factor. Besides funding, TLTRO funds were also considered important for banks’ regulatory compliance with the liquidity ratios, such as the NSFR and the liquidity coverage ratio (LCR). This, in turn, could have implications for the timing of early TLTRO repayments, as banks could be incentivised to repay TLTRO funds in advance, once the residual maturity of the TLTRO ECB-PUBLIC Page 3 of 5 funds falls below 12 or six months respectively. In general, however, early repayments were expected to be low, which would result in a concentration of TLTRO redemptions at the TLTRO maturity dates, which was regarded as a source of concern.”

The next MMCG meeting will take place in Frankfurt on Monday 3 December 2018. If the ECB offers new funding by issuing more TLTROs that might signal that eurozone's revival is still fragile, undermining the ECB’s narrative that the area is back to health and inflation is on track toward its goal, Bloomberg said.

Markets are also nervous about higher US interest rates, Brexit , Italy's budget, rising oil prices and other geopolitical tensions. 

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