Fourth liquidity auction of TLTRO-2: higher demand that expected

The European Central Bank (ECB) yesterday has announced the outcome of the final auction of TLTRO-2 (targeted long-term refinancing operations). These long-term financing operations aim to stimulate lending in the euro zone. The demand for additional liquidity has reached 233.47 billion euros, far above the amount from previous auctions and market expectations.

The TLTRO programs (targeted long-term refinancing operations) consist of liquidity injections or loans at enticing rates that the European Central Bank grants to European banks so that they have access to low cost financing. This allows financial institutions to lower their financing costs, which should lead to cheaper loans to the non-financial private sector (companies and households).

Yesterday, the ECB announced the result of the fourth TLTRO-2 auction. A total of 474 euro zone banks requested an amount 233.47 billion euros an amount that exceeded market expectations (the consensus stood at about 125 billion). Reactions to the result of the latest TLTRO-2 were positive, as it evidences the level of support that the ECB is willing to offer the financial system, and should stimulate the lending activity. Overall, through these four auctions, the ECB has allotted a total of 740.19 billion euros.

Characteristics of the ECB's TLTROs

The ECB announced the first TLTRO in June 2014. The European monetary authority committed to offer eight liquidity windows (starting in September 2014), once every quarter throughout a two year period. In the first two auctions, the ECB offered the banks in the euro area up to 400,000 million euros approximately, i.e., equivalent to 7% of total private sector loan amount (excluding mortgage loans) at very low interest rates (initially 0.25% and later in 2015, 0.05% and 0% in 2016). In the following six auctions there was no limit of funds, but the entities had to use that money to lend to businesses and families. Otherwise, they would have to return in September 2016.

Furthermore, in March 2016 the European Central Bank announced a new program of targeted longer-term refinancing operations, known as TLTRO-2.

Through this program, the ECB has committed to open four liquidity windows, once every quarter from June 2016 to March 2017. Thus, banks can apply for up to 30% of their eligible loan portfolio to the private sector (not including mortgages), minus the amount requested in the first two auctions from the first TLTRO (carried out in 2014). The interest rate for this liquidity will be the same as the ECB benchmark rate (currently 0%). Another change is that banks participating in the auction can borrow at a negative rate if they increase their volume of eligible loans. The loans have a four-year maturity, although they can be repaid quarterly. The ECB has not set a maximum amount