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Aperiodic – n°15/86 – 19 March 2015
ECB: TLTRO, more important than you think
 The take-up at today’s TLTRO exceeded
expectations, with 143 banks borrowing an
extra EUR97.8bn from the ECB. TLTRO will
help expand the ECB’s balance sheet at the
margin but, more importantly, they will
contribute towards improving monetary
policy transmission and to lower borrowing
costs even further. We continue to look for a
stronger pick-up in Eurozone bank lending
in the coming months.
 Looking ahead, it is not obvious that banks
will continue to borrow in such size at the
TLTRO. We project the total TLTRO take-up,
up until the final operation in June, to be
EUR500bn and that excess liquidity is on
course to reach EUR1trn midway through
next year. The near-term impact on rates will
be determined by the take-up at next week’s
regular refinancing operations. We see room
for Eonia to fall on the downside.
Group Economic Research
http://economic-research.credit-agricole.com/
TLTRO, this time is different
While QE has completely overshadowed TLTRO as
the main tool to expand the ECB’s balance sheet, it
does not mean that the latter have become useless
all of a sudden. On the contrary, we have long
argued that TLTRO were a crucial element of
ECB’s credit easing strategy, supporting bank
lending by easing term funding costs further and
making a better use of their balance sheet, despite
regulatory constraint and subdued private sector
demand.
The chart below shows simulations for the maximum,
cumulated TLTRO allowances per country based on
actual credit trends, pointing to a potential
cumulated TLTRO allowance of EUR350bn, i.e.
including today’s EUR98bn. While banks are unlikely
to make full use of their allowances, this number is
likely to rise further in coming months as actual
lending flows continue to pick up. Therefore TLTRO
should provide a self-reinforcing stimulus while
revealing banks’ own expectations of future lending
flows. In all, we view today’s number as excellent
news for Eurozone domestic demand prospects.
ECB:
TLTRO, more important than you think
Frederik Ducrozet
Orlando Green
[email protected]
[email protected]
Maximum ‘stock TLTRO’ allowances based on actual credit flows
125
EURbn
Potential for cumulated 'stock TLTRO' take-up (2015-2016),
based on recent credit trends
100
75
115
50
11
5
2
Portugal
12
Austria
17
Greece
27
Finland
Italy
France
Spain
0
NL
32
Lux.
57
Germany
61
25
Source: ECB, Crédit Agricole CIB
Today’s TLTRO take-up surprised to the upside,
with 143 banks borrowing EUR97.8bn from the
ECB. There is no country breakdown, but we
believe that peripheral banks have been
overrepresented among the bidders, as
suggested by press reports as well. Smaller banks,
in particular, ought to benefit the most since not all
of them can access cheap funding in wholesale
markets.
 As such, and given that banks which would
fail to reach their lending benchmark would
have to repay the full amount of TLTRO
borrowing in September 2016 (including the
first two ‘stock TLTRO’), demand at the ‘flow
TLTRO’ should provide a useful insight into
the banks’ own expectations of future
lending flows, both from a supply-side and
demand-side perspective.
There are three main differences between
today’s TLTRO (and the five additional quarterly
operations to come) and the first two conducted in
2014.
 Finally, in January the ECB decided to
remove the 10bp spread applied to TLTRO
over the MRO rate, implying a fixed 0.05%
cost over the entire life of the operations. That
 The first two ‘stock’ TLTROs in H214 had total
allowance capped at EUR398bn, or 7% of
total bank lending to the non-financial private
sector. For the upcoming ‘flow’ operations,
banks will be allowed to borrow from the ECB
in relation to their lending behaviour. Details
on the lending benchmark calculations can be
found here. Essentially, the more banks lend
(or the less they deleverage), the more
they will be allowed to borrow from the
ECB, with a x3 leverage ratio being applied
to the difference between actual lending and
the benchmark in the reference period from
May 2013 to April 2014. Also, it is important to
note that this is a cumulated process for the
six ‘flow TLTRO’, that is banks will be able to
manage their liquidity needs in a rather
smooth way over the upcoming six quarters.
N°15/86 – 19 March 2015
decision likely boosted demand for today’s
operation at the margin, especially for those banks
still reliant on ECB funding.
TLTRO to boost the recovery in
bank lending
While some banks might indeed use the cash to
add to (sovereign) carry trades, the way ‘flow
TLTRO’ are structured in terms of incentives to
borrow and threat to repay (an obvious stigma to
avoid) suggest to us that a large part of the
liquidity should find be used for other
purposes, including to finance real economy
loans, eventually. From a macro perspective at
least TLTRO are not (only) about size (any more),
but rather they are expected to further improve the
transmission of monetary policy to those market
segments where fragmentation remains an
obstacle to credit origination.
2
ECB:
TLTRO, more important than you think
Frederik Ducrozet
Orlando Green
[email protected]
[email protected]
Monthly flows of credit to households and enterprises
30
20
monthly flow s,
EURbn
(adjusted for
securitisation)
Eurozone credit impulse* and domestic demand
6%
Loans to non-financial
corporations
Loans to households
% of GDP, YoY
YoY %
4%
4%
2%
2%
10
0%
0%
-2%
0
-2%
-4%
-10
-6%
-4%
-20
Credit impulse*
-8%
Private domestic demand (rhs)
-10%
-30
09
10
11
12
13
14
-6%
02 03 04 05 06 07 08 09 10 11 12 13 14 15
15
* defined as the second derivative of credit to the non-financial private
sector as a percentage of GDP
Source: ECB, Crédit Agricole CIB
Source: ECB, Eurostat, Crédit Agricole CIB
Retail interest rates on new ‘SME loans’ heave eased significantly
7.0
Germany
Spain
France
Italy
%
6.0
5.0
4.0
3.0
(annual rate on new loans of 1-5Y maturity
and up to EUR1m)
2.0
03
04
05
06
07
08
09
10
11
12
13
14
15
Source: ECB, Crédit Agricole CIB
It’s not completely clear how these effects will
interact with QE, but we would view both policy
tools as partially complementary, with QE creating
even more favourable conditions for banks to
expand lending. Irrespective of QE positive impact
and side-effects, TLTRO should help refinance
bank liabilities and expand the balance sheet
eventually.
Meanwhile the good news is that the bank lending
cycle
is
turning
following
the
ECB’s
Comprehensive Assessment last year, helped by
past easing measures (rate cuts, forward
guidance, TLTROs, CBPP3/ABSPP). Monthly
credit flows to the private sector have picked
up and leading indicators such as the ECB’s Bank
Lending Survey (BLS) suggest that they will
continue to improve despite a setback in January
N°15/86 – 19 March 2015
(see charts above). Unsurprisingly, borrowing
costs have continued to ease, including for SME
that have been a major focus of ECB’s actions.
Importantly, the growing need for fixed investment
were said to become the main driver of credit
demand, while regulatory constraints were
expected to ease somewhat over time. According
to the BLS, upcoming TLTRO should at least
partly contribute to an expansion in bank loans
to non-financial corporations (90% of the
respondents said past TLTRO would contribute
“considerably” or “somewhat” to this purpose) and
to a lesser extent to households (38%).
In the end, we reiterate our view that the credit
impulse will continue to improve, supporting a
3
ECB:
TLTRO, more important than you think
Frederik Ducrozet
Orlando Green
[email protected]
[email protected]
stronger recovery in Eurozone domestic demand
this year and next.
ECB balance sheet projection
The latest TLTRO take-up boosts the total amount
to EUR310bn across the first three offerings. We
estimate that banks could have taken up around
EUR150bn if they leveraged up three times their
improving net lending activity in the nine months up
to the reference month of January. Judging by the
amount demanded by banks this time around the
leverage seems around 2x. Looking ahead, it is
not obvious that banks will continue to borrow
in such size at the TLTRO, especially as this flow
is likely to be compensated for by a decline in
demand at next week’s MRO (currently EUR142
versus around EUR100bn before the 3Y LTRO
redemption) and/or 3M LTRO (currently EUR110bn
versus EUR40bn before the LTRO spillover).
Moreover, there is a risk that QE could be
counterproductive for this operation over the
coming quarters as liquidity continues to flood the
system. Hence, we project the total TLTRO takeup, up until the final operation in June, to be
EUR500bn.
Clearly, the TLTRO offerings should be the second
contributor to the expanding ECB’s balance sheet,
impacting it by another EUR200bn between now
and end of next year. In addition to the ECB’s large
scale purchases, the impact of the TLTRO on
excess liquidity should push it passed EUR1trn
even as early as mid-2016 (see table below).
Given our positive macro scenario, we assume the
vast majority of the banks will be keen to lend to
into the real economy rather than hand the cash
back to the ECB by September next year. Hence,
we project excess liquidity reaching and
subsequently remaining over and above
EUR1trn during H216. This latest TLTRO figure
should help dampen short-term rates, thus
potentially driving Eonia towards record lows
(we expect -10bp by the end of this quarter), but
much will depend on the how much is borrowed at
MRO and the 3M LTRO next week. 
ECB’s liquidity projections
MRO
3M LTRO
3Y LTRO
TLTROs
CBPP 1/2 outstanding
CBPP3 & ABSPP
SMP outstanding *
PSPP
Total
Autonomous Factors
Reserved requirement
Excess Liquidity
Current
142
110
0
212
38
58
144
9.8
570
329
104
137
Q1 2015
120
100
0
310
38
61
134
50
680
359
104
217
Q2 2015
110
50
0
369
36
91
127
200
856
367
104
386
Q3 2015
100
30
0
419
33
121
116
350
1053
375
104
574
Q4 2015
90
15
0
456
30
151
108
500
1242
383
104
755
Q1 2016
70
10
0
489
27
181
99
650
1427
391
104
931
Q2 2016
50
10
0
524
24
211
90
800
1619
399
104
1116
Q3 2016
50
10
0
524
20
241
80
950
1796
408
104
1284
Q4 2016
50
10
0
524
17
271
71
950
1823
416
104
1303
* SMP is accounted for in Autonomous Factors, hence the Total figure does not account for the SMP figure
Source: ECB, Crédit Agricole CIB, Bloomberg
ECB’s balance sheet projections
3.5
Other - assets
EUR trn
MRO
3.0
TLTRO
CBPP3 & ABSPP
2.5
QE - Agencies
2.0
Other - liquidity
LTRO *
CBPP 1/2
SMP
QE - EGBs
1.5
1.0
0.5
0.0
07
08
09
10
11
12
13
14
15
16
Source: ECB, Crédit Agricole CIB
N°15/86 – 19 March 2015
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ECB:
TLTRO, more important than you think
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No. 15/86 – 19 March 2015
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