TLTRO Matters Eyed, Italian Banks In Focus

TLTRO matters are getting some airtime into today’s ECB decision, with the well-documented banking sector worry and apparent Italian fragilities surrounding the matter dominating (this week’s ECB BLS is not helping).

• Commerzbank note that “Italy is the only country where banks have more TLTROs outstanding than excess liquidity. Moreover, the aggregate €107bn gap for all banks understates the challenge for smaller banks, as excess liquidity is unevenly distributed.”
• So what does that mean for markets? Societe Generale write “Italian banks will have to decide whether to pay back TLTROs with the €245bn in cash they currently have or sell some of their BTP holdings. During July to February, Italian banks preferred a combination of around 70% cash and 30% bonds as a source of funding. We therefore expect them to sell around €42bn of BTPs by June… We expect some widening pressure on BTPs and upward pressure on the Italian repo margin as we get closer to the TLTRO maturity date” in June.
• Furthermore, our policy team ran a sources piece on TLTRO matters back on Friday (available here), noting that “the ECB is likely to discuss bridging finance for the upcoming maturity of €500bn in cheap TLTRO loans to banks, either at its upcoming meeting or in June.”
• Various sell-side names have also touted the potential for such a facility to be outlined as soon as today, given the proximity of the June ECB meeting to June’s TLTRO repayment date.