The ECB Offered More, But None Of It Was Money

At the end of March, the European Central Bank (ECB) offered a second round of bank financing. Dubbed TLTRO’s, T for “targeted”, the program offered banks a chance to obtain direct funding for up to four years at an incredibly low rate. European banks in TLTRO2 were allowed up to as much as 30% of their outstanding eligible loan books as of January 31, 2017 (netted against any previously drawn TLTRO1 balances).

The rate for the original TLTRO’s had been set as the MRO rate on the day of the tender. For this second run, banks were given an added incentive where the cost of funding can be as low as the deposit rate. The ECB recognized these liquidity preferences for once, where it did not want to penalize banks for borrowing the funds (at 0% as the MRO rate) and then holding at least some of them idle in the deposit account (at -0.4%). It was a direct acknowledgement that the intended penalty of NIRP in the first place was a misguided academically-driven endeavor.

To qualify for the reduced funding, banks are to meet certain lending benchmarks up to January 31, 2018. However, the real goal may not be loans at all, especially if banks are merely betting that between now and the 4-year maturity the rate on the deposit account is moved higher as the ECB is tempted to normalize. Why lend and take risk when you can pay a little for none and patiently do nothing as the central bank gives you euros as it once again fools itself?

The take-up for TLTRO2 was much higher than was anticipated. Various surveys of economists were expecting about €110 billion to be sought when in fact more than €230 billion actually was. It is another instructive example about the state of economics, where economists spend all their time trying to guess what the next major statistic will be when it would be far better spent instead understanding the true underlying mechanics leading to why it won’t be anything like the guesses.

In the two months since that happened, inflation in Europe has subsided rather than spiked. To be fair, if there are to be any inflationary effects it is too soon to expect them. But still, this is, of course, nothing new. Full QE was initially begun in March 2015 over two years ago, and the Continent’s HICP rate barely notices if at all. Despite bond purchases through PSPP of €1.5 trillion, additional covered bond purchases of €162 billion under the third such program, and now €82 billion of corporate bonds added to the various NCB balance sheets (totaling €1.8 trillion altogether), total lending in Europe has in those twenty-six months increased by a paltry €108 billion.