There is no doubt that the ECBs
December three-year long-term refinancing operation (LTRO)
auction was the key factor in taking the likelihood of a
liquidity-driven bank funding crisis off the table in
It did the job spectacularly, tricking the markets back into
life, and a
surge of issuance in January followed.
It is, however, interesting to consider what might have
happened if the central bank had announced just one three-year
auction rather than two.
How much of the market activity that followed the December
auction was driven by banks assembling collateral for the
February one? Probably a fair amount particularly given
the string of tender offers that have taken place in eligible
collateral in the interim.
According to research published by SocGén, just a
handful of banks Barclays, Credit Suisse, Deutsche Bank,
Natixis, SEB, SHB and UBS stated their intention not to
take up the ECBs cash at its second February auction.
Indeed, several banks that shunned
the first three-year LTRO auction in December planned to
get in on the action second time around.
At a recent results announcement, Lloyds chief executive
António Horta-Osório said: It might make
sense for us to access the LTRO.
RBS finance director Bruce van Saun has been quoted in the
Financial Times as saying that the LTRO offers relatively
cheap money and there is very little stigma around taking
RBS tapped the first LTRO auction in December for 5
Indeed, many weighed up the pros and cons versus the other
forms of funding available to them before deciding
whether to participate. BNP Paribas commented that
the new categories of collateral are associated with very
big haircuts, so that maybe they can be used better in the
covered bond markets we have a very fine-tuned
assessment of the optimization of all this.
These dont sound like banks that have no recourse to
the market and are using the LTRO as an emergency last resort.
They sound like banks that have recognized a very cheap source
of funding and want some of it for themselves.
The second LTRO auction on February 29 saw 800 banks take
part versus the 523 banks that took part in the first auction
on December 21. That is an awful lot of banks not all of
which cannot access the funding markets reasonably comfortably
on their own. The ECB allotted 529.5bn to LTRO2,
slightly higher than the 489 billion allotted in December
way off the 1 trillion figure that was being
speculated upon earlier in the month. Net new borrowing under
the February auction was around 313 billion - out of a
total of 256bn existing ECB lending 215bn was
rolled into LTRO2.
There is, however, little sign that these three-year funds are
having much impact on the real economy. Yes, peripheral banks
have increased their purchases of government bonds
considerably, successfully easing the sovereign funding crisis
that was brewing at the end of last year. Since the first LTRO
the Italian 10 year has moved from a yield of 6.75% to 5.34%%.
The Spanish equivalent has moved from 5.6% to 5.02%
However, according to SocGén, a larger number of
banks planned to use their LTRO 2 cash for debt repayments
only. Indeed, several have funded their entire requirement for
2012 and beyond via this source. This might be good news
for their shareholders, but is this the best use of ECB funding
at this point? So much for the transmission of credit to the
One three-year LTRO was essential and necessary to avert a
banking crisis and give banks the opportunity to buy themselves
some time. Two LTROs is starting to look a bit like
subsidization of the banking sector.
There have even been mutterings in the market that the ECB
will need to announce a further three-year auction in
September. That just looks greedy.
Indeed, ECB executive board member Joerg Asmussen has been
quoted in Handelsblatt as saying that the central bank cannot
commit to offering more three-year cash to euro-area banks
after the February auction.
There will be no shortage of demands on the ECBs
balance sheet in the months to come, so the regions banks
need to readjust themselves to the realities of their market
and get on with delevering themselves and right-sizing their
balance sheets without unlimited cheap funding to defer the