ECB Research: TLTRO3 – Italy to be main beneficiary

Targeted longer term refinancing operations (TLTRO) - the silent measure that supports loan growth - have returned to the market's attention recently on speculation about the potential for another round/extension of TLTRO and we concur. During the ECB's October press conference, President Mario Draghi said that governing council members (GC) had mentioned the TLTRO without going into detail. Since then, starting just a few hours later, several GC members have mentioned the measure. Since this summer, we have argued that another TLTRO round could be in the pipeline given the new regulatory requirements implemented from July 2019 and that the fragility as well as dependency of southern European banks could be a risk for the banking sector should this terminate. We stress the ECB has not announced a TLTRO3 measure yet but that it is our expectation there will be another round. A recent Bloomberg survey of analysts suggested two-thirds expect some sort of TLTRO.

Current rules - expected to be applied again

We expect another round of TLTROs, which would have similar characteristics as the TLTRO2s, i.e. banks can take up to 30% of the banks' eligible loan stock (loans to households excluding house purchases and loans to non-financial corporations) (for details see TLTRO2 6 EUR11bn of voluntary repayments , 22 June). We expect the new round to be announced in Q1 19 and implemented in Q2 19, before the TLTRO2.1 operation has less than 1Y to maturity. While the ECB's GC has not yet discussed this in detail, we consider it would be a politically 'easy' measure to deploy, as it is supports lending growth and is collateralised (unlike the APP). Further, it would be part of the 'dovish tightening' style that we have seen from the ECB over the past few years. We expect a maturity of three to four years.

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