Winners and losers of the ECB’s negative interest rate policy | Item


TLTRO loan: more popular in the South (until 2020)

As previously stated, the TLTRO rate has been linked to the performance of bank loans since 2016. Until the pandemic of last year, the best TLTRO rate obtainable was equal to the deposit rate. Banks could (in part) offset negative interest rate costs on their reserves with negative interest rate income on TLTRO borrowings. To the extent that TLTRO borrowings exceeded excess (non-exempt) reserves, banks could even make profits. TLTRO loans exceeded reserves in Spain, Italy, Portugal and Greece during the years 2016-2019.

TLTRO loans exceeded reserves in Spain, Italy, Portugal and Greece during the years 2016-2019

Indeed, during this period, the negative rate income of the TLTRO exceeded the negative rate expenditure on the reserves of the Italian banking sector, resulting in what we call a positive narrow gain over the negative rates of 730 million. euros / year on average (see graph below). For the Spanish banking sector, this represented around 430 M € / year. The German banking sector, on the other hand, recorded a small negative rate loss of € 1.1 billion / year, Dutch banks around € 620 million / year and French banks around € 360 million / year. ‘euros / year.

When the pandemic hit in March last year, the ECB changed the terms of the ongoing TLTRO-III, easing the benchmark loan index and lowering the best achievable TLTRO rate to -100bp. This has allowed banks to not only offset the costs of reserve rates with income from TLTRO rates, but also to carry out positive carry – provided they meet their lending criteria, of course. Unsurprisingly, the new strong incentive attached led to the surge in TLTRO borrowing that the ECB had in mind, to ensure that a lack of liquidity would not be a problem in the financial system. As a result, since June 2020, the narrow monthly net result of negative rates (TLTRO rate income minus reserve rate costs) has turned positive for Germany, France and the Netherlands, and has increased significantly for the Italy and Spain.


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