ECB’s very attractive TLTRO II loans – Danske Bank

Pernille Bomholdt Henneberg, Senior Analyst at Danske Bank, suggests that the ECB’s new TLTRO II provides very cheap bank funding with a long maturity and no mandatory early repayments.

Key Quotes

“The TLTRO II has a fixed size and maturity while the price of the loans varies with eligible net lending:

- Size (fixed): A total amount of up to 30% of eligible loans (loans to non-financial corporations and households excluding loans for house purchases) as at January 2016

- Maturity (fixed): Four years from settlement date with no mandatory early repayments

- Price (variable): Fixed at the MRO rate prevailing at the time of allotment, but by exceeding the lending benchmark the rate can be as low as the deposit rate at the time of allotment

The lending benchmark should not be difficult to beat, thus the demand for the TLTRO II loans should be high. For most core countries, the benchmark is set at zero, while a large majority of the periphery countries can continue with declining lending and still get an interest rate on the TLTRO II loans as low as the deposit rate.

The TLTRO II should support bank lending in a longer term: The TLTRO II should clearly support the supply side of a further ease in the loan conditions to the private sector.

From the demand side, we expect enterprises and consumers will continue to increase their demand for loans and credits, which will support the effectiveness of the TLTRO II loans. However, in the near term we expect modest growth in investments due to a cautious approach from businesses. This should follow as Brexit risks, weakness in global manufacturing and a stronger effective euro are headwinds to business sentiment.

Another constraint to improved lending conditions is bank regulation. But as the chart on the right hand side shows, bank lending has picked-up after the ECB finalised its Asset Quality Review (AQR) of banks’ balances in end-2014.

In a longer term perspective, we expect bank lending to continue to grow, as we look for stronger economic growth in 2017 and as the continued very low costs of borrowing support demand for loans for new investments.”