The ECB’s last ever six-month long-term refinancing operations (LTRO) took place on Wednesday, fetching unexpectedly weak demand, according to the newswires.
As Bloomberg reported:
Sixty two banks bid for 17.9 billion euros ($24.1 billion), the Frankfurt-based ECB said today. The cost of borrowing will be indexed to the average of the ECB’s main rate over the life of the loans. Economists forecast that it would lend 60 billion euros, based on the median of 13 estimates in a Bloomberg News survey.
The average amount of allotment was €0.29bn. Reuters, meanwhile, had predicted average demand of €70bn.
On the surface, of course, this looks to be good news. Weak demand for the LTRO not only suggests banks’ liquidity needs have declined, but also that banks are no longer so dependent on the ECB’s long-term operations.
Analysts at Unicredit, however, remind that the drop-off still comes in the context of ongoing dependence on the ECB’s weekly ‘main refinancing operations’ (MRO). As they noted (our emphasis):
The low amount allotted is a clear sign that banks liquidity needs have declined over the last months and that banks do not have real needs to participate to long-term operations to get liquidity, as the weekly MRO will give them the possibility to get unlimited funds at the refi rate if they need, at least until mid-October.
The MRO gives also banks more flexibility in managing their funding needs. This is also confirmed by the fact that the allotment at yesterday’s MRO was EUR 78.3bn and supports our view that the MRO is set to be the main pillar of the Eurosystem in providing liquidity to banks.
Importantly, today’s results should ease concerns related to the effect of the expiration of the 12M LTRO on July 1 (EUR 442bn) on banks’ liquidity needs and on the market.
And, of course, there could be another reason for the drop-off in demand too, given the ECB’s new collateral rules only came into play at the beginning of March. As the Unicredit themselves analysts noted:
Probably, stricter rules on ABS as collateral to get funding at the ECB has contributed to reduce demand at today’s auction. The speculative component of demand should have been affected by the fact that market rates are lower than the refi rate (Euribor 6M: 0.94% and 6M Deposit rate: 0.85%), thus reducing the attractiveness of the 6M LTRO.
Barclays Capital, who predicted all along that LTRO demand would probably fetch weak demand, meanwhile attributed another potential factor to Wednesday’s outcome: Ireland’s NAMA.
As BarCap analysts wrote early on the day:
Looking at who has bid before, who re-deposits money at the ECB and the limited bidding likely to originate from the Irish NAMA probably reinforces our expectation for a low number. We went through the details of what it means in the Global Rates Weekly: essentially such a number would not change that much in terms of liquidity conditions overall, and the important event remains the maturity of June LTRO on 1 July and its aftermath.
Suggesting Ireland’s banks may have been particularly dependent on the ECB’s LTRO operations pre-NAMA.
Related links:
Around the world in three Libor rates – FT Alphaville
So farewell, 12-month LTRO – FT Alphaville
The ECB as liquidity monster – FT Alphaville
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