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Banks flock to the ECB's long-term negative interest rate loans

Published on July 09, 2020 - 2 mins reading time
Bank watch
The European Central Bank has granted 742 banks a total of 1,300 billion euros in long-term loans, or "Targeted Long Term Refinancing Operation" (TLTRO). These particularly attractive loans, at negative interest rates, are granted to banks to enable them to lend to individuals and businesses.

Particularly attractive loans

The banks' enthusiasm for these targeted long-term loans is due to an extremely attractive offer. Indeed, banks obtain these loans from the European Central Bank at a negative rate of -1%, which means they earn money by borrowing.

In return, they must commit to financing the real economy, by granting sufficient loans to individuals and businesses. In other words, the ECB pays the banks so that they can continue lending.

What will these long-term loans be used for?

Banks will not only use these long-term loans to grant credit, but also to refinance TLTROs obtained in previous operations. 420 billion could be earmarked for this refinancing.

Another possibility is that some banks may choose toinvest in government bonds offering a positive yield, thereby achieving a double win. Moreover, borrowing at negative rates to lend at positive rates will also offer banks the opportunity toincrease their margins.

In any case, more than 40% of the ECB's 1,300 billion euros will be used directly to finance loans to businesses and households.

ECB support in the face of the crisis

This measure is in addition to the 750 billion euro " Emergency Pandemic Purchasing Programme " (EPPP) set up by the ECB in mid-March, which was increased to 1,350 billion euros in early June. Its aim is to support European markets weakened by the health crisis, through purchases of government bonds and short-term corporate debt.

"Extraordinary circumstances call for extraordinary action. There is no limit to our commitment to the euro. We are determined to use the full potential of our tools, within the framework of our mandate", declared ECB President Christine Lagarde at the start of the crisis.

The ECB's aim is to keep lending rates low, so as not to repeat the credit crunch of the 2008 crisis, and to tighten or even halt bank lending to individuals and businesses.