European Central Bank: Structural LTROs could ease funding pressure - Rabobank

Rabobank's Bas van Geffen, analyses how forthcoming structural Longer-term Refinancing Operations (LTROs) could complement the European Central Bank's (ECB) standard refinancing operations as excess liquidity declines. The report argues that 12‑month LTROs, likely auctioned via variable‑rate tenders once Main Refinancing Operations (MROs) demand reaches about €100‑125bn, may slightly flatten EUR money market term rates without fully countering the impact of quantitative tightening.

Structural LTROs and reserve demand

"The ECB could start discussions about the design of structural LTROs towards the end of this year, but the launch date depends on banks’ demand for reserves. We believe 12 months is a plausible maturity for these operations. Moreover, the ECB may issue the LTROs by auction, instead of the fixed-rate, full-allotment procedure."

"If the ECB proceeds with its reported plans to raise the minimum reserve requirement, that may accelerate discussions about the design of structural LTRO. We could see the Governing Council discussing this in Q4, or early next year, with launch later in 2027. But, ultimately, the launch date of these LTROs hinges on banks’ demand for reserves."

"To the extent that historical context extrapolates to the present liquidity situation, data suggests that LTROs could start when MRO demand reaches €100 to 125 billion. The smallest 3-month LTRO tender was €15 billion, when MRO demand was structurally at least €100 billion."

"Various metrics of term funding availability and costs are currently being watched as indicators of how close liquidity is to the inflection point. As quantitative normalisation continues, we expect more pressure on term rates. However, LTROs may reverse some of this."

"This implies that, in aggregate, LTRO will probably be allotted to banks with the highest funding costs in term markets. Their switch to central bank liquidity could skew weighted average term funding rates lower – although we are sceptical that it will meaningfully compress Euribor-OIS spreads, due to the composition of the Euribor panel."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)