Euro banks took EUR130bn in the December

Euro banks took EUR130bn in the December TLTRO – not enough to reach the ECB's balance sheet target

Banks’ take-up in the December TLTRO was EUR130bn, which implies the total for the first two TLTROs was around EUR210bn out of EUR400bn eligible (7% of the total amount of eligible loans outstanding in April 2014). This was in line with our expectations, but probably lower than the ECB had hoped for.

The take-up in the TLTRO will increase the ECB’s balance sheet, but the net impact will be unknown until tomorrow, where the repayment of the 3Y LTRO is announced. It will then become apparent whether the take-up is a roll-over of the current 3Y LTRO. The effects on excess liquidity and money market rates are also dependent on both the take-up in the December TLTRO and the repayment of the 3Y LTRO, as they both settle on Wednesday next week.

Without a broadening of the ECB purchases, the TLTRO would have been the main contributor to the expansion of the ECB’s balance sheet towards the intended EUR3tr. However, the figure released today shows that the current measures are unlikely to be enough to increase the balance sheet sufficiently. This also holds when the available liquidity on the remaining TLTROs is included (see more below).

Under the current ECB easing measures we expect the balance sheet in March 2015 to be close to the level of September 2014, when Draghi mentioned the soft balance sheet target for the first time. Hence, we expect the ECB to announce government bond purchases in Q1, 10 December 2014.

Six additional TLTRO allowances, but with a lower potential take-up

Looking ahead, six additional TLTRO allowances running from March 2015 to June 2016 remain. The potential take-up of the future allowances differs from the first two, as banks each quarter will have access to borrow three times the cumulative amount of eligible net lending in excess of a specified benchmark, see ECB easing – will it work? #1 ECB’seasing measures revisited, 25 August 2014.

Given the observations for net lending in May-October, euro area banks are currently eligible to borrow EUR166bn in the TLTROs from March 2015 to June 2016. The potential take-up on the first allowance in March 2015 depends on accumulated net lending until January 2015; hence the liquidity boost is still uncertain (we have six out of nine data points on a national level).

Assuming the latest trend in net lending is continued until January, banks would in total be eligible for EUR264bn at the March TLTRO. Hence, even if banks demanded all the available liquidity at the March TLTRO, the first three TLTROs would only increase the balance sheet by around EUR480bn. As EUR260bn is still outstanding on the 3Y LTROs, this would not give a large boost to the balance sheet in early 2015.