- We list a number of arguments favouring either a small or a large take-up at the
- second three-year LTRO on 29 February
- We conclude that the allotted amount is likely to be between EUR300bn and
- EUR600bn.
- A smaller amount would cause sovereign spreads to widen, while a bigger amount would be likely to cause the most notable market reaction with a risk rally in many asset classes. How much?
- Concerns about stigmatisation could argue for a very low take-up at this second LTRO. In this respect, it is important to note that influential voices have argued that using the LTRO is stigmatised, most notably Deutsche Bank’s CEO Josef Ackermann who has argued that “The fact that we have never taken any money from the government has made us, from a reputation point of view, so attractive with so many clients in the world that we would be very reluctant to give that up”. However, at the latest ECB press conference Mario Draghi opposed the view that the LTRO should be stigmatising when he said “the three-year facilities are there to be used. There is no stigma whatsoever attached to these facilities. This has to be understood by everybody”. So maybe the stigmatisation argument has lost some importance.
- The roll-over from the maturing LTRO is limited. As little as EUR38.6bn matures in the 3M LTRO, while EUR166.5bn expires in the MRO.
- There is already plenty of excess liquidity in the system (around EUR480bn).
- Although there is already plenty of excess liquidity in the system, this is not easily accessible for banks with low ratings.
- This is a very good bargain. For banks willing to buy, for example, Spanish or Italian short-dated bonds there is a very nice profit to be made (assuming that sovereign defaults are not becoming a bad habit).
- Concerns about the future may have risen in many banks, as Moody’s put 114 European banks on review for a downgrade last week. This argues for a large take-up. Banks facing the risk of downgrades may decide that it is better to be safe than sorry.
- The easing of collateral rules to include bank loans also argues for a large take-up. The broadening of the collateral rules is, in particular, aimed at helping small- and medium-sized banks, which may not have sufficient collateral packaged in such a way that fulfils the ECB’s normal eligibility criteria and which are important for lending to SMEs. However, the broadening of the collateral base gives all banks an opportunity to take up a significant amount, making a very large take-up such as EUR1,000bn or more a possibility. Following the January ECB press conference, the ECB sent out a press release stating that the Governing Council had at that stage approved the temporary acceptance of additional credit claims as collateral for seven countries.
- Car manufacturers often own a bank that finances customers’ vehicle purchases. Some of these banks, most prominently Volkswagen Bank GmbH, which is fully owned by Volkswagen, have indicated that they may use their loan portfolio to access the cheap ECB funding. This should increase the take-up at this second 3Y LTRO and, importantly, it could also be a very direct channel for lending to be passed on to the real economy.
At the first 3Y LTRO, the take-up from banks was EUR498bn causing significant excess liquidity in the system. The big question is now how much banks will take at the second LTRO on 29 February, which could be the last opportunity to borrow three-year money from the ECB. Below we discuss the different arguments for a small or a large take-up.
Arguments for a small number
Arguments for a big number
One part of the banking sector will not use the LTRO. A number of large, primarily German-based, banks will avoid using the LTRO due to concerns about the stigma. Banks with high ratings may also decide not to participate, as they can borrow very cheaply in the market.
For the other part of the banking sector, this is simply a very good deal. Some may have taken plenty at the first LTRO but for many others it does not really matter that there is plenty of excess liquidity in the system because they cannot cheaply access it. The broadening of the collateral base to include bank loans also means that we could see a number of new participants in the LTRO.
All in all, we expect the allotted amount to be between EUR300bn and EUR600bn. To reach a EUR1,000bn figure, we would probably need both groups of banks to participate in the LTRO.
Market reaction
The median expectation in a Reuters’ poll with 28 participants published today is a EUR470bn take-up, with a high of EUR750bn and a low of EUR300bn.
We expect the market reaction to be muted if the allotted amount is within the EUR300-600bn range. A smaller amount would cause sovereign spreads to widen and could trigger a fall in EUR/USD, though the market reaction could be modest. A bigger amount is likely to cause the most notable market reaction with a risk rally in sovereign bonds as well as other assets. Unlike the consensus view, we would regard a large amount as EUR/USD supportive given the positive effect on risk assets, that investors are already short EUR/USD and that we do not expect the LTRO to trigger a big rise in inflation expectations.