Tough Choices On TLTROs Today (2/2)

No matter the change, there would be reputational risk for the ECB by amending the rules mid-game.

• Ahead of the meeting, Eurozone banks are predictably arguing for favourable terms: the European Savings and Retail Banking Group put out a press release this week saying a retroactive tightening of TLTRO terms "would have serious negative consequences for banks and for the European economy, in addition to implying high legal risks for the ECB itself."
• Our Policy Team reports that while "it would be easier to limit the proportion of a bank’s reserves that can receive the Deposit Rate, Executive Board officials are confident that legal concerns can be allayed" on other options.
• Reputationally, an outright retroactive change in TLTRO borrowing terms would probably be a more damaging option than reverse-tiering on deposit earnings. But the latter has the disadvantage of likely being more complex, and might not inventivise enough repayments..

While a TLTRO change is expected at this meeting, it is difficult to know what outcome is currently priced in. Multiple sell-side analysts didn't expect any TLTRO changes as of a couple of weeks ago, and while there's recognition that today's meeting will bring a change in policy, there appears to be no real conviction on what the ECB will decide.

• If new TLTRO rules come into play for the next repayment date (Dec 21 settlement), it could lead to a reduction in liquidity that sees ESTR inch higher for example. This would depend in the end on how much banks decide to repay and thus how much liquidity is reduced.
• Earlier repayments are seen reducing collateral scarcity, a key theme in repo / swaps markets in recent months.
• If the ECB plays it safe by opting for reverse tiering, Eurozone bank stocks -which have been in a downtrend all year (see chart)- would probably respond positively.

Eurostoxx Banks Index, EURSource: BBG, MNI