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The ECB has launched a new round of liquidity support for banks this week Announced. From September, banks will be able to claim deposits from the central bank through the so-called TLTRO programme. This will make it easier for banks to lend to consumers and businesses. The aim of this measure is to keep lending flowing, so that the central bank is more likely to meet its inflation target of 2% over the medium term.
The ECB has already provided liquidity support to banks on several occasions in recent years. During the European debt crisis, the central bank provided a few hundred billion in liquidity to the banking sector. The first round of TLTRO (Targeted Long-Term Refinancing Operation) followed in 2014 and a second round in 2016. Since the first round of TLTRO a total of €770 billion in liquidity has been provided to the European banking sector. These are loans with a maturity of four years, which means that banks must repay all loans from the second round by next year at the latest.
It is striking that the ECB is now coming up with a third round of liquidity support for the banking sector. After all, the economy is showing growth again and the central bank stopped buying government bonds last year. The fact that a new round of TLTRO is now needed suggests that the banking sector is not in such a strong position after all. This new round of emergency liquidity can also be explained as rolling over the existing liquidity program. After all, if the banks really had sufficient buffers, a new round would not have been necessary.
To date, liquidity has mainly been provided to the banking sectors of Italy (€250 billion), Spain (€167 billion), France (€90 billion) and Germany (€80 billion). The banks will have to repay that amount next year. From September, they will be able to register for the new round of loans, which will have a shorter term of two years. Italy's banking sector is struggling with many bad loans, while Germany's banking sector is struggling to remain profitable due to low interest rates. In that respect, the new round of TLTRO did not come as a complete surprise.
The ECB didn't just announce a new round of liquidity support this week. The central bank also announced that interest rates will remain low until at least the end of 2019. It will also continue to fully reinvest the proceeds of repaid loans under the asset purchase programme. The central bank will continue to roll over these bonds, at least until the moment when interest rates start to rise again. This means that monetary policy is not yet in the process of normalising and that interest rates are likely to remain low for the foreseeable future.
In response to the central bank's decision, the euro fell to its lowest level against the dollar since mid-2017. At the same time, yields on long-term 10-year government bonds issued by Spain and Italy fell. Bank stocks also benefited as the news broke, as did the price of gold.
