ECB research: Draghi reveals favourable TLTRO

Investment Research General Market Conditions
4 July 2014
ECB Research
Draghi reveals favourable TLTRO details

The ECB has provided additional details about the targeted LTRO (TLTRO)
announced at its meeting in June. However, the potential boost to liquidity is still
unknown as it depends on future net lending.

We note that there are no penalties for using the TLTRO for government bond
carry trades (at least until September 2016) and, in our view, the cost of the refi
rate +10bp looks very attractive from a financing perspective.

The benchmark, which determines the potential take-up in the TLTROs from
March 2015 to June 2016, depends on whether the participants are positive or
negative net lenders in the 12-month period to April 2014.

We consider the situation from the perspective of the aggregate German and
Spanish banks and conclude that German banks must increase net lending to be
eligible for the TLTRO 3-8 while it is more attractive for the Spanish banks, as
they on an aggregate level enter the programme as negative net lenders.

Even though the final repayments of the current LTROs will occur before the
TLTRO 3-8 auctions, we are not overly concerned about the evolution of excess
liquidity being squeezed from this date mismatch as the fixed rate full allotment
procedure ensures a bridge of this roll of liquidity.

We believe the TLTROs to be positive for peripheral banks’ funding situation
and peripheral assets in particular. Furthermore, favourable benchmarks should
imply higher excess liquidity and lower rates in the money market.
Senior Analyst
Pernille Bomholdt Nielsen
+45 45 13 20 21
[email protected]
Analyst
Anders Vestergård Fischer
+45 45 13 66 41
[email protected]
Assistant Analyst
Lars Sparresø Merklin
[email protected]
Maximum and potential take-up of TLTRO 1+2 and net lending benchmarks for TLTRO 3-8
EUR bn
MFI loan stock to
private sector**
TLTRO 1 & 2
Initial max. take-up**
Net lending May 2013 May to April 2014***
Assumed take-up
NFCs
Households****
Total
Euro Area
5,690
398
310
-125
-26
-151
Germany
1,350
95
66
4
-1
3
France
1,099
77
54
5
-3
2
Netherlands
414
29
20
-5
-3
-9
Belgium
140
10
7
0
0
0
Austria
219
15
11
-1
-1
-2
Finland
98
7
5
4
1
5
- Core countries
3,319
232
163
7
-7
-1
Italy
1,075
75
68
-40
-3
-44
Spain
769
54
48
-68
-12
-80
Greece
139
10
9
-5
-1
-6
Portugal
120
8
8
-7
-1
-8
Ireland
- Pheriphery countries
- Other EA countries
110
8
7
-6
-2
-8
2,213
155
139
-128
-19
-146
157
11
8
-4
0
-4
*Private sector loans excluding lending for house purchase ** 7% of eligible loan stock *** Gross issurance minus redemptions **** Excluding lending for house purchase
Source: ECB, Danske Bank Markets
Important disclosures and certifications are contained from page 6 of this report.
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ECB Research
LTRO 1
31 Jan
2012
LTRO 2
28 Feb
2012
Banks took
EUR1,019bn
TLTRO 1
Sep
2014
TLTRO 2
Dec
2014
Initial allowance
7% of eligible loans
(up to EUR 400bn)
Jan-Feb
2015
Maturity of
LTRO 1& 2
Excess liquidity will fall banks will use MRO instead
Timeline of the LTRO maturity and eight TLTRO auctions
TLTRO 3
Mar
2015
TLTRO 4
Jun
2015
TLTRO 5
Sep
2015
TLTRO 6
Dec
2015
TLTRO 7
Mar
2016
Additional allowance
3x [Net lending benchmark]
(size unknown)
TLTRO 8
Jun
2016
Sep
2016
Sep
2018
Repayment TLTRO
for banks with no
improvement in net
lenders vs.
benchmark
Final
repayment
all TLTRO
Source: ECB, Danske Bank Markets
TLTRO 1+2 can boost liquidity by a maximum of EUR400bn
In the two initial allowances (18 September and 11 December 2014), banks will be able to
take 7% of the total amount of their loans to the euro area non-financial private sector,
excluding loans to households for house purchase, outstanding on 30 April 2014.
The total outstanding amount of eligible loans is given and the maximum take on the first
two TLTROs is EUR400bn. Considering the periphery and core countries they will be
able to take EUR155bn and EUR232bn, respectively. Hence, the first two TLTROs imply
a larger potential amount of funding to the banks in the core countries.
Nevertheless, the periphery countries are expected to take a larger share of the potential
liquidity due to the banks’ funding situation. We assume the periphery banks take 90% of
the potential liquidity while the core countries are assumed to take 70% of the possible
amount. The quite high take-up in the core countries is assumed as the TLTRO can be
used to carry trades for the first two years and, as Draghi said yesterday (3 July), “this
opportunity, which, indeed, from a financing viewpoint, looks attractive”. Given our
assumptions, this will have an overall euro area liquidity effect of EUR300bn before yearend.
Potential take-up on TLTRO 1+2
EUR bn
MFI loan stock to
private sector**
Excess liquidity set to increase by EUR300bn before year-end
TLTRO 1 & 2
Initial max. take-up**
Assumed take-up
Euro Area
5,690
398
310
Germany
1,350
95
66
France
1,099
77
54
Netherlands
414
29
20
Belgium
140
10
7
Austria
219
15
11
Finland
98
7
5
- Core countries
3,319
232
163
Italy
1,075
75
68
Spain
769
54
48
Greece
139
10
9
Portugal
120
8
8
Ireland
- Pheriphery countries
- Other EA countries
110
8
7
2,213
155
139
157
11
8
*Private sector loans excluding lending for house purchase ** 7% of eligible loan stock
Source: ECB, Danske Bank Markets
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4 July 2014
Source: ECB, Danske Bank Markets
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ECB Research
TLTRO 3-8 will give most liquidity to deleveraged banks
From March 2015 to June 2016, banks will each quarter have access to borrow three
times the cumulative amount of their net lending in excess of a specified benchmark. The
benchmark depends on whether the bank was a positive or negative net lender in the
12-month period to 30 April 2014.

For positive net lenders, the benchmarks will be set at zero. This implies positive net
lenders only have to continue to expand lending to obtain the TLTROs.

For negative net lenders, there will be one benchmark until April 2015 which is the
average monthly net lending in the year to 30 April 2014 extrapolated for 12 months.
From May 2015 to April 2016, the benchmark monthly net lending is set at zero.
Consequently, the negative net lenders can continue deleveraging but if they do it at a
slower pace than in the 12-month period up to April, they are eligible for the
TLTROs.
The cumulative amount of a bank’s future net lending is not known, hence the potential
take-up is unknown. In order to get a better idea of the impact on excess liquidity in the
additional allowance of the of the six TLTRO (3-8), we consider the aggregate situation
in Germany and Spain and make some assumptions in order to get an idea of the potential
take-up and their dynamics for positive and negative net lenders (see appendix).

In Germany, we assume banks continue their net lending at the same pace as in the
12-month period ending in April 2014. This implies German banks on aggregate can
increase their funding by around EUR1bn through the TLTRO 3-8. This looks to be
an extremely conservative scenario as the German economy is expanding which
implies a more healthy outlook for credit demand and supply. However, the case
illustrates that German banks must increase net lending to be eligible for the TLTRO
3-8.

In Spain, we assume banks do not increase their net lending but maintain their current
outstanding loan amount (hence zero net lending going forward). As Spanish banks
on aggregate have deleveraged by EUR80bn in the 12-month period ending in April
2014, they will on aggregate be able to extend their funding by EUR241bn through
the TLTRO 3-8 in this scenario. In light of the previous deleveraging, this looks a bit
optimistic, but it illustrates that the TLTRO 3-8 is most attractive for banks who enter
the programme as negative net lenders.
Spanish banks have deleveraged up until April 2014
German banks have increased net lending marginally
Source: ECB, Danske Bank Markets
Source: ECB, Danske Bank Markets
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4 July 2014
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ECB Research
Worried about LTRO run-out and funding gap dont
underestimate the power of Fixed Rate Full Allotment
There is currently a total of EUR432bn left in the LTROs allotted in 2011 and 2012.
These will mature at the end of January 2015 and the end of February 2015 respectively.
If these numbers are seen in isolation, this will leave a liquidity gap if our estimate of
EUR300bn take-up is realised, and will not even be fully covered with the assumption of
maximum drawdown of the two initial TLTROs of EUR400bn. The maturity of both
LTROs in early 2015 implies that the additional amount of TLTRO liquidity cannot be
used for rolling over existing LTRO loans.
Development in excess liquidity from LTRO to TLTRO
EUR bn
530
MRO has previously acted as buffer on LTRO changes
1,019
1,000
800
600
489
432
400
MRO acts as
buffer
586
200
TLTRO 1 & 2
LTRO 1 & 2
outstanding
LTRO 1 & 2
repayments
LTRO 2
(Feb-12)
LTRO 1
(Dec-11)
0
LTRO 1 & 2
total amount
DB estimate
of 300
Source: ECB, Danske Bank Markets
Source: ECB, Danske Bank Markets
However, this consideration misses the point of the Fixed Rate Full Allotment procedures
on the ordinary one-week MRO operations and three-month longer-term refinancing
operations (LTROs) that were extended at the June meeting until at least December 2016.
The ordinary ECB operations could easily be used to roll over the repayment of the
existing three-year LTROs and the TLTROs both in size and in timing of allotment.
Hence, we are not overly concerned about the evolution of excess liquidity being
squeezed from rolling outstanding three-year LTROs into the new TLTROs as the ECB
has provided the mechanics to bridge this roll of liquidity.
We expect excess liquidity in the euro system to be significantly above the current levels
of EUR140-170bn when the TLTROs come into force.
What to look for in the coming months
In the coming months we will get more information about the participation in the
TLTROs and actual allotment in the initial allowances with the first amount settling on
24 September. In the table below we provide an overview of the upcoming information.
When do we know more schedule of the TLTRO
Date
Comment
28-Aug-14
Banks participating in the TLTRO has to send reporting to sign up to program Potential press comments on bank level on participation
11-Sep-14
National Central Banks inform banks about their borrowing limit
17-Sep-14
Deadline for banks to submit bids
18-Sep-14
Allotment on TLTRO 1
24-Sep-14
Settlement on TLTRO 1
10-Dec-14
Deadline for banks to submit bids
11-Dec-14
Allotment on TLTRO 2
17-Dec-14
Settlement on TLTRO 2
March 2015
Auctions on TLTRO 3 (additional amount)
Will the ECB disclose overview of participation?
Excact amount of TLTRO 1 known
Excact amount of TLTRO 2 known
Excact dates on TLTRO 3-8 not published yet
Source: ECB, Danske Bank Markets
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4 July 2014
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ECB Research
Market reaction
Our positive assessment of the TLTRO details for especially peripheral banks was
reflected in the market reaction where periphery markets rallied strongly despite upward
pressure on core rates following another batch of strong US data. This is not
unsurprisingly since, given the construction of the TLTROs, the excess cash can easily be
used for carry trades the next years. Furthermore, the favorable benchmarks for both
negative and positive net lenders should on the margin imply higher excess liquidity than
we had initially expected and therefore slightly lower rates in the money market.
However, there are still uncertainties regarding participation and actual liquidity take-up
and we believe MFI lending data will be crucial for markets going forward.
Appendix
German banks assumed to continue current pace of net lending
Germany
Apr-14
EUR bn
Loans outstanding
TLTRO 1-2
TLTRO3
TLTRO4
TLTRO5
TLTRO6
TLTRO7
TLTRO8
Sep-14 - Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
1350
Annual growth rate
1,353
1,353
1,354
1,355
1,356
1,357
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
TLTRO 1-2
94.5
7% of total amount of loans
TLTRO 3-8
Benchmark
0
0
0
0
0
0
Excess over benchmark
0
2
3
4
5
6
7
3x excess over benchmark
7
10
12
15
17
20
102
104
107
109
112
114
Maximum take-up
Total
Source: ECB, Danske Bank Markets
Spanish banks are assumed to not increase their net lending
Spain
Benchmark
TLTRO 1-2
TLTRO3
TLTRO4
TLTRO5
TLTRO6
TLTRO7
TLTRO8
Apr-14
Sep-14 - Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
EUR bn
Loans outstanding
769
Annual growth rate
769
769
769
769
769
769
0%
0%
0%
0%
0%
0%
-60
-80
-80
-80
-80
-80
60
80
80
80
80
80
180
241
241
241
241
241
234
294
294
294
294
294
TLTRO 1-2
7% of total amount of loans
53.8
TLTRO 3-8
Benchmark
Excess over benchmark
3x excess over benchmark
-80.2
Maximum take-up
Total
Source: ECB, Danske Bank Markets
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Disclosure
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The authors of the research report are Pernille Bomholdt Nielsen, Senior Analyst and Anders Vestergård
Fischer, Analyst.
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