At its meeting on March 12, the Governing Council of the ECB unleashed new, unconventional monetary policy measures to support the liquidity of banks and credit to households and businesses. The new package includes, among other things, changes to the current longer-term auctions (TLTROs) and introduces new weekly auctions (LTROs) to steer banks towards the June TLTRO auction. The new conditions applied to transactions are quite complex: this article highlights the possible strategic responses of banks to maximise the benefits of the measures.
LTRO auctions: These are weekly auctions aimed at guaranteeing liquidity, which will be carried out from March 16, 2020 and expire on June 24, 2020. It will then be possible to roll over the loan into TLTRO III. The interest rate applied will be fixed, equal to the average rate on ECB deposit facility (-0.5 percent). There will be full allotment of the required amounts. These auctions can be used in the event of a temporary liquidity crisis or to temporarily extend credit lines to customers. They have the benefit of being repayable in the short term (June 2020) and do not require reaching any credit target. It is also worth remembering that, thanks to the tiering system, excess liquidity of banks whose deposits at the ECB are less than six times the required reserves can be remunerated at a zero rate (carry trade option).
Change to the TLTRO III auctions: The conditions applied to these auctions present important new elements compared to those outlined by the Eurotower in July and then September 2019. The maximum amount that a bank can obtain rises from 30% to 50% of the stock of eligible loans in February 2019 (net of what has already been drawn in the previous TLTRO auctions); the voluntary redemption option can be exercised after 12 months (from the previous 24) and the take up limit for each single auction has been removed (it previously equaled one third of the total amount).
In addition, there is a recalibration of the conditions on the TLTROs between June 24, 2020 and June 23, 2021. This is one of the main new and more generous features of the stimulus package, aimed at supporting the provision of credit. For this period alone, the rate applied to all outstanding TLTROs will be 25 basis points below the Eurosystem's main refinancing rate for those who do not reach the credit target (-0.25 percent), and 25 basis points below the average rate on ECB the deposit facility (-0.75 percent) for those who reach the credit target. Moreover, the credit target (benchmark net lending) is calibrated on the net lending between April 1, 2020 and the end of March 2021, which implies a much lower threshold for Italian banks. Overall, the most favorable conditions will be in place for a year, which means that banks would benefit from concentrating the demand for funds at the June 2020 auction.
In other words, because outside the June 2020-June 2021 window the TLTRO III will return to the old conditions, banks have the incentive to request the full amount of available TLTROIII funds at the June 2020 auction in order to obtain the maximum possible benefit. Loans to firms in 2019 have in fact fallen, making it more difficult to exceed the lending target calculated on the old benchmark (the 12 months preceding March 31 ,2019). Getting the maximum benefit by immediately requiring all the available amount, however, reduces the period covered by ECB loans.
Within the package of measures there is considerable scope to choose the best strategy for each operator's needs and business model. Knowing how to carefully plan demand for funds and having an in-depth knowledge of the scenario, will be fundamental to facing the crisis.
The optimal funding strategy will also have to take into account the new "Cura Italia" decree – which contains credit support measures for households and businesses and a more extensive use of public guarantees – as well as any further initiatives at European level.