TLTRO alone might not be a game changer for Eurozone credit recovery

From an economic perspective, the philosophy behind the TLTRO is complex. The first big expansion of the ECB’s balance sheet was executed in the two 3-year LTROs in December 2012 and February 2013, which together injected roughly €1 trillion of low cost funds into the system. However, this balance sheet expansion was designed with an automatic exit mechanism built in as the maturity of the cash was limited with options for early repayment. It is uncertain as to whether the new TLTROs will become an equally meaningful factor for the ECB’s balance sheet.

We estimate that the 4-year TLTRO funding at 15bps implies a c.75bps cost differential relative to the current independent cost of senior unsecured funding for the French banks, c.60bp for the German and over a 100bp in Italy and Spain. At face value then, it is clear that the TLTRO should provide a funding opportunity for the sector. Moreover, given that 3-month LTRO has a 0% weighting in the Net Stable Funding Ratio (NSFR) methodology, whereas we would expect TLTRO to have 100%. We would estimate that TLTRO would add +3-4pp to a bank’s NSFR relative to 3-month LTRO use which would be worth the marginal cost, at least for any banks with ratios <100%