On
June 5, 2014, the ECB has announced a new refinancing program for
European banks. It is called TLTRO which stands for “targeted
longer-term refinancing operations”.
What
is the purpose of TLTRO?
With
TLTRO, the ECB intends to improve bank lending to Europe’s
non-financial private sector. In other words, the central bank wants
banks better fund companies of the real economy.
To
achieve its purpose, the TLTRO provides for mandatory repayments if
the bank’s net lending (i.e. lending adjusted for redemptions, loan
sales, and securitizations) to the real economy falls below
predetermined benchmarks. Quarterly reporting obligations and annual
audits of data accompany this repayment mechanism.
Who
can benefit from TLTRO?
Banks
in the Euro area can use TLTRO to refinance their lending to the real
economy. However, loans to households cannot enter into consideration
if they serve house purchases.
What
are the conditions of TLTRO?
The
maximum amount each bank can initially borrow depends on its
outstanding loans to the non-financial private sector on April 30,
2014. Its borrowing capacity cannot exceed 7 % of such amount.
Additional
allotments depend on each bank’s net lending to Europe’s
non-financial private sector between 30 April 2014 and the respective
allotment reference date.
Banks
pay interest, in arrears, at the Eurosystem’s main refinancing rate
at the time of take-up plus 10 basis points.
24
months after each TLTRO allotment, banks will start repaying the
respective loan, at a six months frequency.
Finally,
TLTRO are subject to the same collateral rules as any other
refinancing operation in the Eurosystem.
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