ECB Loans Ripe for Rethink as Officials Mull Slowdown Response
European Central Bank officials poised to debate the need for new long-term loans for banks might have some even bigger thinking to do.
With less than two weeks to go before the Governing Council meets, policy makers are gearing up to discuss whether their response to the region’s economic slowdown should include an update to its targeted lending program, known as TLTROs. But some officials are wondering if they shouldn’t also deliver a more permanent fix to the ECB’s long-term funding for banks.
Such a revamp of the central bank’s operations is arguably overdue after years of ad hoc efforts to plug festering liquidity holes in the system since the onset of the financial crisis and subsequent sovereign-debt turmoil in Europe.
“Policy makers have already done a lot to bolster lending, and anything they do on top of that should aim to continue to incentivize credit growth,” said Juergen Michels, chief economist at Bayerische Landesbank in Munich. “But while they’re at it, they should also think about creating a facility that offers regular longer-term funding of at least two years.”
The ECB’s discussions are taking place against a backdrop of deteriorating growth. Since officials warned in January against any hasty moves on stimulus, data have painted a bleak picture of the 19-nation economy, while risks in the form of a U.S.-European trade war and a messy Brexit have increased.
“In terms of the policy options they have, what’s the road of least resistance they have at least in the short term? They are not going to relaunch quantitative easing soon,” said Nick Kounis, head of macro and financial markets research at ABN Amro in Amsterdam. “Hurdles for TLTRO and for pushing out rate hikes are lower — so surely that’s the first port of call.”
The existing TLTRO program is due to start expiring in June 2020, but it’s an issue this year because funds of less than one-year maturity don’t count in certain regulatory calculations.
ECB officials including Chief Economist Peter Praet and Benoit Coeure, in charge of markets, have both said new TLTROs will be discussed as a way of supporting the economy. Praet also warned of a risk that banks exacerbate any slowdown by acting “even more pro-cyclically than they usually do.”
There’s little evidence yet of a consensus on either urgency or a particular course of action, and hawkish policy makers including Bundesbank President Jens Weidmann, based on past form, may argue there’s no monetary policy case to answer. Governing Council member Ewald Nowotny has already said a decision could wait until the summer.
Also coloring any deliberations will be questions of perception, with the ECB already facing criticism that its generous liquidity offers are subsidizing struggling lenders. But that perception may be one motivation for a wider discussion on the legacy of a decade of temporary operations.
Bank of France Governor Francois Villeroy de Galhau signaled on Friday that the ECB, now in a post-QE hiatus, “should look at the whole spectrum of possible tools, including various forms of LTRO.”
The longest regular liquidity operations of the ECB currently are three months. The central bank loaned banks more than 700 billion euros for four years in 2016 and 2017 on the condition that they extend credit. It has also pledged official interest rates will remain unchanged at least through the summer.