In the ECB's TLTRO3.1 operation (19 September) banks took only EUR3.4bn, while banks decided voluntarily to repay EUR32bn next week. Despite the low take up resulting in net liquidity drainage, the ECB and markets should not be concerned, with excess liquidity still above EUR1.7trn Only 28 banks participated in the operation.
TLTRO operations will run quarterly until March 2021, so banks will have plenty of opportunities to take liquidity. The ECB should not be concerned with low take up.
Take up surprisingly low
Euro area banks decided to take EUR3.4bn in TLTRO3.1 operations today. This was markedly lower than expected (also lower than our below-market consensus of EUR20- 30bn), however it will not impact the loose liquidity standards.
The low liquidity take up needs to be seen in the context of changed terms last week where the ECB decided that the quarterly operations running until March 2021 should be each of 3-year maturity but also sweetened the rate by 10bp (now from MRO to deposit rate).
Today's operation cannot be rolled into the 7th and last operation in March 2021, as the early repayment optionality in today's operation only falls in September 2021. That may also have been a reason for the low take up. However, we expect the ECB to extend the TLTROs as we believe it is an underappreciated and uncontroversial tool.
Space in core, but not expected to take much
The maximum potential take up of 30% of eligible lending leaves more space in core countries than in peripheral countries. We estimate that on a banking system level, German banks would be able to take up to EUR368bn over the 7 operations. Similarly, Italian and Spanish banks could take up to EUR43bn and EUR44bn respectively.
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