When the European Central Bank announced its targeted lending program back in 2014, policy makers including President Mario Draghi held out great hopes that it would finally get financial institutions extending credit to companies and households again.
Based on that narrow measure, it has been a flop.
Since the cash from the first of the Targeted Longer-Term Refinancing Operations landed at euro-area banks in September 2014, lenders have taken hundreds of billions of euros in funds, mostly for free. Yet from that day until now, total outstanding credit to the private sector has increased a mere 0.42 percent.
The outcome doesn’t match the intentions expressed by ECB Executive Board member Benoit Coeure in July 2014, when he said that “the idea is not simply to offer funding relief to banks, but to offer clear incentives for them to allocate new credit to the real economy.”
Yet the Frankfurt-based central bank didn’t introduce just one policy that summer — long before quantitative easing was agreed — but several, including reducing its deposit rate below zero for the first time. With those negative rates adding to the squeeze on banks already suffering from weak profitability, a massive bad-debt pile and regulatory uncertainty, the TLTRO has morphed into a subsidy that prevented an even worse outcome.
“Judged against the criteria of whether it has significantly increased bank lending, the TLTROs haven’t been a success,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Judged against the criteria of ‘has it been a worthwhile program to support the banking sector in a period of negative rates?’ then yes, it has been worthwhile.”
The first series of TLTROs was designed in such a way that the more banks lent to the real economy, the more central-bank funding they could get at ultra-low rates. The terms and the price of the offers were substantially watered down in 2016 as the euro area flirted with deflation. As it stands, the ECB might end up actually paying banks to take its cash.
When Draghi announced the program and negative rates in June 2014, it was alongside purchases of asset-backed securities, the extension of fixed-rate full allotment and the end of operations aimed at absorbing liquidity from crisis-era programs.
“The underlying spirit is that we want to enhance lending to the non-financial companies in the private sector,” he said then.
Lending to households for consumption has fared better than corporate funding, increasing 4.2 percent over the period, but spurring a consumer-credit pickup was never the central bank’s core aim. A real economic recovery requires companies to invest, create jobs, and increase production.
And if anything is bringing the currency bloc to that point it’s the much larger, and much later, program of quantitative easing. The bond-buying plan, now scheduled to total 2.28 trillion euros ($2.5 trillion), was eventually launched in March 2015, demonstrating how schisms in the 25-member Governing Council have forced the ECB to roll out its response to the region’s post-crisis collapse and stagnation piecemeal rather than all at once.
TLTROs may be one instance where central bankers can’t just conjure up a reality by saying it. The program was always a little like pushing on a string. While the ECB initially calculated a theoretical maximum take-up for TLTRO-2 of 1.6 trillion euros, in the absence of demand for credit the actual volume has been less than half that.
Instead, the program may have helped ameliorate a particularly negative set of circumstances for lenders in the adjustment period after the financial crisis. The banking sector, particularly in Italy, still hasn’t been freed from the burden of 921 billion euros of non-performing loans, according to a separate ECB report published Thursday.
And lenders have to somehow make money in an environment where the official deposit rate of minus 0.4 percent means interest margins are squeezed. For every million euros parked at the ECB each year, banks have to pay 4,000 euros, and that’s a cost they’ve struggled to pass on to customers — though some have tried.
That suggests that the expectations for TLTROs of the ECB’s chief economist, Peter Praet, from July 2014 may have been more realistic. Then, he spoke about the need to “halt the vicious cycle of constrained lending, weak macroeconomic conditions and elevated loan delinquencies.”
The ECB can claim some success on that front. Annual growth rates of credit to the real economy have been modestly positive since the end of 2015. In other words, without the credit-easing measures, things could have been much, much worse.
“Looking at the transmission to the real economy, it’s too early to say whether it was a success,” said Annamaria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan, which took up 12 billion euros in Thursday’s round. “But it was also constructed with a different logic: to give back to the banks what they lost from negative rates.”