A new financing program on the horizon?

7th December 2018
-IAM, News

Daniel Pfund, Senior Financial Analyst

The European Central Bank (ECB) could soon announce a new financing plan to support the economy. This plan would be used to finance at a very low cost banks that lend to consumers and businesses, with the ultimate goal of boosting economic growth and inflation. There have already been two such plans (called TLTRO, for Targeted Long-Term Refinancing Operation). The first was launched in 2014 and the last in March 2016. Commercial banks could borrow up to 30% of the amount of their existing loans from the ECB over a long-term period (4 years). The rate that banks had to pay depended on the amount lent to economic actors, and the rate could even be negative (-0.4%) if a bank increased enough its loans. Clearly, banks had a strong incentive to lend money because not only did they earn interest on debtors, but they also received money from the ECB!

Some economists fear that without a new TLTRO 3, lending interest rates would rise too much and hinder the potential growth of the European economy. Indeed, some less well capitalised banks, especially Italian, would not be able to increase their loans without this free money. As the ECB has now completed its asset purchase program, this could exacerbate a negative currency effect. It remains to be seen whether the ECB is receptive to these arguments.