September 19, 2019 / 10:10 AM / 25 days ago

ECB's stimulus weapon has weak start

FILE PHOTO: Sign of the European Central Bank (ECB) is seen outside the ECB headquarters in Frankfurt, Germany, March 7, 2019. REUTERS/Kai Pfaffenbach

FRANKFURT (Reuters) - Demand was unexpectedly low on Thursday for a new round of ultra-cheap European Central Bank funding, a disappointment for a bank that portrayed the facility as a powerful tool to keep credit flowing to the economy.

Banks took up just 3.4 billion euros worth of loans in a longer-term refinancing operation (TLTRO), signalling a drop in excess liquidity, since they had already agreed to repay 31.8 billion euros worth funds early from a similar facility.

“Today’s number was a clear disappointment and suggests the TLTROs will be a much less potent weapon than the ECB was hoping,” Nordea economist Jan von Gerich said.

The ECB last week improved the terms of the facility, extending the maturity to three years from two and benchmarking it to the bank’s minus 0.5% deposit rate, essentially giving banks a rebate if they meet their lending targets.

“While even lower rates will probably not do much to spur demand, the TLTRO sweeteners could have potentially had some positive effects on lending. Now even such hopes have been dented,” von Gerich said.

But others noted that some technical factors limited the take up. Banks had little time to digest the new terms, announced just last Thursday, and they are waiting for the ECB to introduce a tiered deposit rate on Oct. 30, which gives banks an opportunity for arbitrage.

“The ECB’s two-tier system should have been an important driver of banks’ demand for term liquidity, in our view, especially in Italy where banks will have about 30 billion euros in unused exempted reserves that they could use to arbitrage the rates differential between TLTROs and the ECB’s tiered rates.

With banks borrowing at minus 0.5% and depositing this cash at 0%, the facility provides an arbitrage opportunity, suggesting that take up will be significantly higher in the ECB’s December auction.

Still, the arbitrage will do little to boost lending to the real economy, indicating that actual demand for the facility is lukewarm, given lenders’ relatively easy access to cheap funding.

Reporting by Balazs Koranyi, editing by Larry King

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