Sunday, October 26, 2014

TLTRO – How the ECB refinances long-term loans to the real economy

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.