The European Central Bank (ECB) announced a series of stimulus measures at the start of the month which involved a cut in the interest rate down to 0.05% and a raft of other measures. Part of this package was the offer from ECB of €400 billion in loans available to banks for repayment over a lifetime of up to four years – just compare that to the cost of your overdraft, mortgage, credit card debt. The aim was to furnish banks with cheap cash that they could mark-up and lend to business to stimulate recovery within the Eurozone. The loans are known as TLTROs which hardly trips of the tongue. It stands for Targeted Longer-Term Refinancing Operations. However, only €82.6 billion of the available funding has been taken up, spread amongst 255 Eurozone banks.
So what lies behind the reluctance of banks to take on what is virtually free money and enable them to turn a healthy profit? – a commercial loan will certainly cost several percent, depending on its size, duration and the perceived risk of the venture. The answer may be that the banks are holding fire until after October when the ECB will announce additional measures, expected to include plans to purchase asset-backed securities. In addition, there may be reluctance by the banks to take on more debt prior to the next round of ECB-led “health checks” within the banking sector – unless the loan from the ECB could be turned around immediately, it would show up as a debt in the bank’s ledger, weakening its position somewhat.
Analysts had expected the take-up for TLTROs to be between 100 to 200 billion Euros at the first offer. Banks will have a second opportunity to obtain this funding in December. It is a shame that there is no mechanism for the ECB to lend directly to businesses with expansion plans involving taking on new staff, but it is not within the bank’s remit.