The ECB is about to make yet another policy decision to stimulate the economy. The EU central bank will pay European banks to give them money. Yes, you read it right. In the recent TLTRO move, the ECB will lend EU banks money at negative rates. The move is seen as encouraging the central banks to lend money to households and small businesses in order to keep the economy liquid as the world entering yet another lockdown.
The coronavirus pandemic is not yet over, and as the winter approaches in December, things could deteriorate again. Many workers were laid off in the first lockdown spell which lasted for almost six months and even longer in some parts of the world. This has put banks under great pressure, as most households don’t want to take on new debts with the murky future outlook. However, most governments across the globe have postponed debt payments by households and businesses until October.
This financial TLTRO financial stimulus package is aimed at encouraging banks to lend at negative rates. Consequently, the banks borrowed €174.5 Billion, an amount which is much lower than the previous amount borrowed by EU central banks three months ago. In June, European Banks borrowed €1.3 trillion.
The central bank is providing every incentive they can to keep the market liquid and to encourage central banks to take the new money. The ECB is literally paying banks to take liquid money which, theoretically, they should then lend out to the consumers. Bloomberg, however, said that, "most lenders now consider themselves well-financed."
This new amount taken up by the European banks has taken the total TLTRO outstanding amount to €1.75 trillion, 10% above the previous €1.6 trillion levels. This amount is priced at a rate of -1% for year one and -0.5 % for years 2 and 3. The official policy rate of minus 0.5% isn’t enough to keep the economy liquid, so this new TLTRO is considered a counterbalance to that. The difference between the rates is -0.5%. One wonders why the ECB still has the NIPR (Negative interest rate policy).
The recent TLTRO bid came from 388 banks, which is also quite moderate compared to the 742 banks who participated in the month of June. This recent take up will add some €158B into the economy. Goldman observed that further capacity for more TLTROs still exist, and we may see more auctions in the future. Bloomberg commented that these loans would push excess liquid cash levels in the economy to more than €3 trillion, which will be the highest in history.