Third liquidity auction of TLTRO-2: higher demand than the previous

The TLTRO programs (targeted long-term refinancing operations) consist of liquidity injections or loans at enticing rates that the European Central Bank grants to European banks so that they have access to low cost financing. This allows financial institutions to lower their financing costs, which should lead to cheaper loans to the non-financial private sector (companies and households).

The results of the second session of TLTRO-2 were announced this morning by the ECB. A total of 200 euro zone banks requested an amount of 62.16 billion euros and have reedemed 14.16 billion euros from previous auctions. That means an amount of additional liquidity close to 47,9 billion euros at the upper end of expectations. This could be a sign that bank lending is picking up. In the first auction of the TLTRO-2, the demand for additional liquidity was 36 billion euros and 34 billion in the second

Characteristics of the ECB’s TLTROs

The ECB announced the  first TLTRO in June 2014. The European monetary authority committed to offer eight liquidity windows (starting in September 2014), once every quarter throughout a two year period. In the first two auctions, the ECB offered the banks in the euro area up to 400,000 million euros approximately, ie, equivalent to 7% of total private sector loan amount (excluding mortgage loans) at very low interest rates (initially 0.25% and later in 2015, 0.05%). In the following six auctions there was no limit of funds, but the entities had to use that money to lend to businesses and families. Otherwise, they would have to return in September 2016.

Furthermore, in March 2016 the European Central Bank announced a new program of targeted longer-term refinancing operations, known as TLTRO-2. Through this program, the ECB has committed to open four liquidity windows, once every quarter from June 2016 to March 2017. On this occasion, banks can apply for up to 30% of their loan portfolio to the private sector (not including mortgages), minus the amount requested in the first two auctions from the first TLTRO (carried out in 2014).

The interest rate for this liquidity will be the same as the ECB benchmark rate (currently 0%). Another change is that banks participating in the auction can borrow at a negative rate if they increase their volume of eligible loans. The loans have a four-year maturity, although they can be repaid quarterly. The ECB has not set a maximum amount