Initial Results of the ECB’s Targeted Loan Operation Fall Below Expectations

October 02, 2014 | David Hernandez, CFA, Associate Director

This week’s chart examines the results from the first round of the European Central Bank’s (“ECB”) targeted long-term refinancing operation (“TLTRO”) which occurred on September 18th. The ECB announced this program in June 2014 with the goal of encouraging lending to small and mid-size companies in the region. The TLTRO essentially provides a four-year loan to banks at a fixed low rate. This serves as one of several tools the ECB has utilized to address the low inflation and contracting credit conditions in the Eurozone.

With 400 billion euros available, only €82.6B were borrowed by banks, well below the €150B estimated by a Bloomberg survey. Considering the initial outcome, investors are starting to question the potential effectiveness of the program. However, it is important to note that in the month of October the ECB will announce the results of the Asset Quality Review (“AQR”), which is a comprehensive assessment of banks’ balance sheets. The Eurozone’s financial institutions may be more willing to participate in the TLTRO after the stress tests are complete. The second round of TLTRO is slated for December and will provide insight into loan demand in the region as well as essential feedback to the ECB about the effectiveness of its policies. Without stronger demand for loans from this program, strong growth in the Eurozone would seem dubious, and thus participation in later rounds of TLTRO bears watching.