MNI INSIGHT: Any Fresh TLTRO Less Generous,No Cliff-Edge Fears

Any fresh rounds of cheap loans to banks via the European Central Bank's TLTRO scheme are likely to be less generous, MNI understands.

While targeted longer-term refinancing operations, which in their most recent iteration have been provided at 50 basis points below the deposit rate, or -1% to access funds for lending to eligible businesses, have been essential to maintaining the flow of credit to the economy during the pandemic, some officials would prefer banks to be less dependant on central bank credit. The ECB's main refinancing operations, providing loans at 0%, would also provide a fallback in the absence of further TLTROs, according to this reasoning, which crosses the eurozone's usual north-south divide.

NO NEAR-TERM CLIFF EDGE

Deciding whether to launch fresh TLTROs would be a complex process, based on detailed examination of the transmission of bank lending to monetary policy. But if the programme is repeated, the 50-basis-point pandemic subsidy in recent TLTROs, and available in another tranche in December, would be excessively generous as conditions normalise, some officials reason. With TLTRO-III loans carrying a three-year maturity, officials are not concerned by cliff-edge funding needs in the near term.

Another way of helping banks could be to relax the tiering ratio, which exempts a portion of banks' reserves held at the ECB from the negative deposit rate. While TLTROs might be seen as hooking lenders on cheap central bank funds, the rise in reserves caused by ECB bond buying is not banks' fault, so some officials might be open to providing further relief by relaxing the ratio, MNI understands.