ECB Hands Banks 399 Billion Euros With Promise to Pay for Loans

  • Economists predicted TLTRO-2 take-up of 420 billion euros
  • U.K. referendum on EU membership probably helped boost demand

The European Central Bank handed 399.3 billion euros ($444.4 billion) to euro-area banks in the first round of its new loan program that offers to pay lenders to lend if they boost credit to real economy.

The take-up in the first of four targeted longer-term refinancing operations, known as TLTRO-II, compares with an estimate of 420 billion euros in a Bloomberg survey of economists. It amounts to a net borrowing of 31 billion euros after banks pay back loans obtained under an earlier program.

The largess of the new program is part of the ECB’s drive to persuade banks to provide more credit to companies and households, spurring economic growth and reviving inflation. The plan was announced in March as part of a wider stimulus package that also included interest-rate cuts and an expansion of quantitative easing.

Demand for the four-year funds may have been boosted by uncertainty about the outcome of the U.K.’s vote on European Union membership. Banks had to submit their bids yesterday when Britons headed to the polls. Final results published Friday showed 52 percent of the U.K. electorate opted to quit the 28-nation bloc.

Banks took more than 430 billion euros in the previous, less-generous TLTR0-I program and will give back 368 billion euros of that cash on June 29 under an early-repayment option.

Loan Demand

The quarterly TLTRO-II operations will be initially charged at the main refinancing rate, currently zero. That can fall as low as the deposit rate, now minus 0.4 percent, if banks expand their eligible loan book by 2.5 percent by the end of January 2018. ECB President Mario Draghi said earlier this week the new loans “should further ease the borrowing costs of the private sector and provide an additional impulse to credit creation.”

Loan demand is rising steadily but it’s hardly booming. Lending to non-financial corporations in the region rose 1.2 percent in April from a year earlier, while credit to households climbed 1.5 percent.

Bidders for the loans may have included Greek banks after the ECB decided on Wednesday to restore their access to regular funding lines. The Governing Council reinstated a waiver that allows them to pledge the country’s junk-rated sovereign debt as collateral in exchange for funding. The decision came after euro-area governments last week approved the payment of 7.5 billion euros of aid for the debt-strapped nation.

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