MNI SOURCES -2: ECB Expected To Adopt Evolving Reinvestments

--ECB Seen Phasing In New Capital Key For Reinvestments Over Time

--Some Pushing Back On New TLTRO; Needs Europe-Wide Case

     LONDON (MNI) - The European Central Bank is expected to announce at next

week's meeting that it will phase in its new rules governing purchases of bonds

under its reinvestment plans, as it shifts its focus to maintaining the QE stock

and reinvesting its maturing securities, eurosystem sources told MNI.

     A rebalancing of the ECB's capital key -- adopted by the ECB this week and

effective January 1 2019 -- reduces the weight of some countries, like Italy,

while raising that of others including Germany. Moreover, some sources noted the

capital key may need further rejigging after March 29 2019 if the UK does leave

the EU and the Bank of England's stake must be redistributed.

     An abrupt change to the new capital key would be potentially problematic,

not only because of the potential market ramifications for fiscally weaker

governments but also because the bank already holds very high quantities of

German debt. However, some ECB officials noted that there was already a degree

of discretion in overall capital key allocations and that would certainly be

continued.

     --REINVESTMENTS

     As a result, officials will probably decide to make the transition to the

new key a gradual one, an ECB source said, and the central bank might allow

itself two to three years before its stock of bonds reflects the new guide. This

would amount to a commitment to keep its balance sheet stable for that period,

the source said.

     Purchases might stray from the key from month to month, due to the pattern

of redemptions, the source added.

     Another source noted that the guiding rules will remain in place under the

amended capital key, and "reinvestments will likely not be a different programme

from that under APP ... the underlining rules remain the same".

     Another source preferred less precision over the time frame, in the hope

that financial markets would be convinced reinvestments would continue for as

long as necessary.

     Reinvestment could also prove a useful tool if the withdrawal of asset

purchases prompted tighter monetary conditions. ECB chief economist Peter Praet

suggested in a recent speech that the proceeds from shorter-term maturing debt

could be invested in longer-duration paper in order to flatten any steepening of

the yield curve. But there is little prospect of such an operation, reminiscent

of the Fed's "Operation Twist" in 2011, for the moment, a eurosystem source

said.

     Officials pointed to the fact that the ECB has already slashed its bond

buys without significant negative effects.

     "We are not really tightening. The APP stock remains the same and we

reinvest," an ECB source said.

     --TLTRO DISCUSSIONS

     Other matters considered within the ECB include a possible fresh round of

targeted longer-term refinancing operations. Loans made under earlier E740

billion TLTRO programmes expire in 2020 and 2021, and some of these will stop

counting towards banks' net stable funding ratios around mid-2019, with Italian

banks particularly exposed.

     ECB officials have told MNI that a fresh round of TLTROs has been

considered, but this time one ECB official said that while some countries are

lobbying for the funding, others are pushing back.

     The ECB must still decide whether there is a general need on the part of

eurozone banks for more TLTRO money, or whether it would merely ease the funding

requirements of some banks, the official said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$E$$$,M$X$$$,MX$$$$,M$$EC$]