Long term refinancing operations (LTROs) are open market operations the European Central Bank (ECB) uses to control banking system liquidity.
|MROs are seven day refinancing operations held weekly against collateral.
STROs are held once a month and maturity length is one maintenance period.
LTROs mature after three months, six months, 12 months and 36 months.
The ECB's open market operation policy tools provide eurozone banks with low-interest loans. They consist of main refinancing operations (MROs), special term refinancing operations (STROs), and long term refinancing operations (LTROs).
Three-month LTROS are held monthly. The ECB's first supplementary LTRO with a six-month maturity was announced March 2008. The €25 billion auction drew bids amounting to €103.1 billion, from 177 banks. The first tender was more than four times oversubscribed. Another €25 billion six-month tender was allotted on 9 July. The ECB has since increased the allotment from €25 billion to €50 billion, with a maximum bid amount of $5 billion
The first 12 month LTRO in June 2009 had close to 1100 bidders.
On 21 December 2011 the bank instituted a term of 3 years (36 months); 523 banks that took part in the first auction. Loans totalling €489.2 billion ($640 billion) were announced. The ECB's second 36 month auction, LTRO2, was held 29 February 2012, providing 800 eurozone banks with further €529.5 billion. 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.
A possible LTRO3 is currently being discussed.
Recent Euromoney LTRO coverage
"We [Credit Suisse] do not expect the ECB to announce further LTROs at next week’s meeting [April 4], as excess liquidity in the Eurosystem is still ample (over €450bn) and banks have started to repay LTRO refunding."
What Oaktree Capital Management hadn’t bargained for, however, was the impact that the ECB’s two long-term refinancing operations (LTROs) would have on the distressed investing environment.
The market had expected roughly €100 billion of LTRO repayments; when banks in fact paid off €137 billion, worries set in of an imminent reduction in the short-term liquidity injections from the ECB.
The European Central Bank’s announcement that 278 eurozone banks repaid €137.2 billion of their long-term refinancing operation (LTRO) borrowings on January 30 was seized upon by the market as supporting evidence for a broad range of contradictory positions.
European Central Bank president Mario Draghi's mooted bond-buying plan needs shock-and-awe to arrest market panic over Spain and Italy's elevated financing needs, in the absence of new fiscal resources for the EFSF/ESM.
Without a third round of the ECB's long-term refinancing operation, Italian banks will deleverage by up to €444 billion over the next two years - triggering regional contagion if, as is likely, sovereign spreads jump.
Assumption is that central bank liquidity will keep on coming.
ECB’s Praet says liquidity provision “a delicate balancing act”
The ECB’s three-year LTRO, while appearing to restore banks’ access to wholesale markets, exacerbates the problem of structural subordination for bank bondholders.
Substituting sovereign collateral for loans relieves encumbrance concerns; Bundesbank and Oesterreichische Nationalbank push back against programme collateral
There is no doubt that the ECB’s 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 Europe.
The terms and longer duration of the LTRO have the potential to seriously interfere with the European debt capital markets, says lawyer.
Peripheral banks prefer to fund cheaply from the ECB rather than expensively from the market, even though investors might take fright.
Three-year ECB loans should be for emergencies only. They should not become a replacement for Europe’s bank funding market.
Bankers predict the next round of ECB financing could top €1 trillion. But it will take more than an LTRO-induced liquidity injection to fix Europe’s banks.
Will Europe’s leaders do enough to convince banks to finance its problem sovereigns through an ECB-led carry trade?
ECB lets banks delever in orderly fashion; Bank bond issues might be scarce this year
“The LTRO is a lot more positive than we’d originally expected."
The €489.2 billion take-up of the ECB’s inaugural three-year LTRO on Wednesday underscores the significance of this new facility to the bank funding market in Europe.
Banks may opt for cheaper long-term LTRO funding rather than secured issuance next year
The ECB announced two new Long-Term Refinancing Operations (LTROs) in October – one for 371 days and one for 406 days. Total borrowing at the October 26 auction was €101.5 billion, with 181 bidders for the 12-month LTRO (far lower than the 1,121 that bid in the June 2009 LTRO). But for how long can the ECB substitute itself for the interbank lending market?
Just when Europe’s big banks have begun to repair their balance sheets and return to profitability, along comes the European sovereign debt debacle. With huge stockpiles of government bonds on their books, can the region’s banks avert a second catastrophe?
ECB offers longer-term finance via six-month LTROsMay 2008