The TLTROs provide easy lending at low costs to banks within the euro area (the countries that use the euro as their currency). These financial operations are destined to incentive investment in households and loans to non-financial institutes.
History of the TLTROs
The first TLTRO, known as TLTRO I, was implemented in June 2014 by the ECB as a series of measures to increase the bank’s credit for loans to non-financial institutions and households, except the loans for house purchase. This measure would set a base for the interest rate to the different bank entities, and it would stay valid for two years.
In March 2016, they launched TLTRO II, which consisted of four targeted operations with a duration of four years each, starting in June 2016. In October 2016, the ECB implemented an amendment to correct an inconsistency on the deadlines, and later in July 2019, they applied a change for the voluntary early repayments of the amount.
Lastly, in March 2019, the ECB implemented a third TLTRO, this time consisting of seven operations with a duration of three years each, starting in September that year. Later they applied a small change on the measure, adding that after two years, they could have access to a repayment option.
What are the consequences of the TLTRO?
Although the economy in Europe seemed to improve after the implementation of these measures, some experts doubt the effectiveness of the ECB’s programs and may think that it is only a matter of time before deflation hits the European countries once more. The need for liquidity is essential for the upcoming months. Still, the more the ECB allow these loans, it leads to having a sense that there is continuous instability of the Eurozone economy, and it may not find the path to robust growth soon.
Also, many banks took advantage of the TLTROs as extensions of the Long-Term Refinancing Operations (LTROs) they already had and used that new loan to repay the previous ones. The Targeted Longer-Term Refinancing Operations may seem like a great solution to the economic crisis in Europe. Still, the ECB can’t assure that they will solve the problems in the short future.
The initiative of the European Central Bank to apply different measures like the Targeted Longer-Term Refinancing Operations to help with the economic troubles that the continent is suffering, seems to have proved somewhat effective over the few years. It may have given immediate results, and the end of the deflation fight is still far, but TLTROs gives opportunities to the non-financial sector to invest and move the economy.
Still, the ECB must take notice of the use of the TLTRO by some banks, and act accordingly. That may be possible to achieve by looking for other alternatives to increase inflation from near-zero levels and allow liquidity to flow through the countries that need it across the continent.
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