ECB: Europe Can’t Bend

Tomorrow we learn of the participation of the second opportunity to borrow funds from the ECB under the Targeted Long-Term Repo facility. Recall that this year’s access was limited to 7% of a bank’s loan book (loans to households and businesses excluding mortgages). Next year’s access is somewhat linked to growth of that loan book. 

The amount aggregate size of the eurozone banks’ loan book implied they could borrow as much as 400 bln euros this year.  At the first opportunity, banks borrowed 82.6 bln euros. This was very disappointing, but there were some mitigating factors, like the pending results of the Asset Quality Review and the stress tests. 

Tomorrow’s takedown is expected to be stronger. Banks are expected to draw down about half of the 317 bln euros that the have the potential to borrow. The less the participation, the stronger will be the calls for the ECB to engage in a sovereign bond purchase program to make good its intention to expand its balance sheet by roughly one trillion euros. 

The risk is on the downside. Rather than duplicate the success of the Long-Term Repo, which were widely used, the TLTRO appears, in practice to be a subsidized loan facility to mostly peripheral banks. Core banks are unlikely to be significant participants.There is no generalized need for additional liquidity, especially given the ECB’s 20 bp tax on excess liquidity parked with it. There are other sources of cheap funding available.  Banks can borrow as much as they want (have collateral for) from the ECB with its full allotment of repos at 5 bp. 

Even if the participation is greater than anticipated, it is still difficult to see how the ECB’s balance sheet can expand by some much based on current efforts. Consider that the covered bond and asset-backed securities purchases have totaled a little less than 22 bln euros. Already there have been reports warning that the ECB is modest purchases of covered bonds is crowding out the private sector.