We expect the TLTROs will boost liquidity. However, the amount of borrowing limits is unknown as it depends on net lending behaviour - we list four different scenarios that give an upper target ranging from EUR450-1.350bn.
The liquidity is spread over the eight different TLTRO auctions and looking at our scenarios, the potential take-up is biggest in TLTRO 3 and to some extent TLTRO 4 (Mar-15 and Jun-15) and fading from then on. This follows as net lending benchmarks are most generous in the first year.
Although there is a potential mismatch between the repayment of the outstanding LTRO borrowing and available funds across countries from the first three TLTRO auctions, we see less prospects of falling off a 'liquidity cliff' as the regular MRO auctions have previously been used to bridge liquidity operations.
We have estimated a relationship between the level of excess liquidity and Eonia and conclude that although it most likely requires additional liquidity to get Eonia below 0.00% (or further ECB cuts), the market implied expectations for excess liquidity (around EUR200bn in June 2015) is in the lower end of our expectations.
We share the view of Mario Draghi who has repeatedly described the TLTROs as a "very attractive program". Hence, we expect banks to demand the TLTRO loans and that liquidity in the euro system will increase - but the big increases will most likely happen with the 2015 operations.
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