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Lack Of Collateral Hampers LTRO Loans

ByThe National Bank of Canada
Published 05/30/2012, 12:04 PM
Updated 05/14/2017, 06:45 AM
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Last week’s de facto nationalization of a large Spanish bank is probably not the last in Europe. The massive writedowns relating to a real estate bust and exposure to shaky sovereigns is difficult to absorb, more so in a recessionary environment.

'Refi' Mechanism Losing Its Teeth
The ECB’s long term refinancing operations, which helped provide liquidity to cash-strapped banks late last year and in February of this year, seem to be losing their effectiveness. A drop in the value of collateral offered by some banks to the ECB is now making it harder for them to qualify for LTRO loans. So much so that according to the ECB’s latest weekly financial statements released yesterday, total LTRO loans fell a massive €21 bn in the week of May 25th. That happened to coincide with a €34 bn increase in “other” claims on euro area credit institutions (which includes the Emergency Loan Assistance program).
LTRO & 'Other' Claims
The irony is that the worse the banking troubles get, the ECB’s LTRO exposure diminishes, as those loans are replaced by ELA’s, which are provided by national central banks.

A set of measures more forceful than the stop-gap ELA is clearly necessary and markets will be seeking leadership on that front from European policy makers, including the ECB.

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