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What is 'LTRO' and how does it work?

We explain the European Central Bank (ECB)'s plan to bolster the region's banks, known as the long term refinancing operation (LTRO).

What is 'LTRO' and how does it work?

What is LTRO?

The long term refinancing operation (LTRO) is a cheap loan scheme for European banks that was announced by the European Central Bank (ECB) towards the end of 2011 in a bid to help ease the eurozone crisis.

Round one was carried out on 21 December, when banks took €489 billion from the ECB. The loans are due to be repaid within three years at a rate of 1%, and a second round will be launched on 28 February, with the results of how much money was requested due on 29 February.

As the eurozone crisis has escalated, banks have become less stable and have less money to lend. The objective of the LTRO is to boost cash flow in the market and avoid a severe credit crunch or collapse of the banking system. 

Why are banks signing up for LTRO?

Eurozone banks are strapped for cash, and with the ongoing crisis in the region, investors have become slow to back them up. As the money starts to dry up banks face a potential funding, or 'liquidity', problem.

Economists say the biggest strain on eurozone banks is repaying their debts to bondholders – these redemptions are 'absolutely massive' this year, according to ING Bank's Padhraic Garvey.

How does LTRO work?

Banks in Europe ask the ECB for the loan. The loan is then backed up by collateral through the bank’s own national central bank, meaning each country vets the collateral for the loans given to banks.

The loans differ from the ECB’s previous monthly, longer-term lending programme, which allowed banks to take money for a three-month term at low rates.

What was the impact of LTRO?

The first release last December is credited with boosting the markets, and contributing to the New Year market rally.

However, there is scepticism about the broader impact. Analysts at ING Finance estimate that only €50 billion of the €489 billion remained out in the economy, and instead of creating more liquidity in the broader market, most of the money remains on the balance sheets of banks.

Who asked for the money last time?

The biggest recipients of LTRO in December were banks in the weaker eurozone countries. In December Italy took €110 billion, Spain received €105 billion, France claimed €70 billion, Greece asked for €60 billion and Ireland requested €50 billion.

This time analysts will be scouring the results of the auction to see if banks in stronger European countries request any money. German, Dutch and Finnish banks took up the smallest amount of funding last time.

Are there any drawbacks to LTRO?

There are a few possible pitfalls. One is that credit ratings agencies see it as a black mark against banks. Tapping the lending scheme could be seen as an admission of weakness.

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4 comments so far. Why not have your say?

William Bishop

Feb 28, 2012 at 15:07

LTRO has done quite a bit to restore financial confidence, but may have little economic influence unless it encourages banks to ease lending standards. This latter seems unlikely when the pressures to boost capital and reduce external funding remain so strong..

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shaon mukherjee

Feb 28, 2012 at 18:24

If these banks are borrowing at a low rate of 1% it would be nice if they lent the money out to their customers at 2-3% and not 5-6%.

Better still put the new money in the bank account of all EU citizens, let us spend/invest it. The recovery will be well on the way.

Personally this LTRO thing is not gonna do anything, trying to get out of debt by going in to debt. Another 12 months they'll need some more free money.......

Buy gold and guns citzens

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Feb 28, 2012 at 19:02

let's get this straight. the banks are short of cash because they won't lend their clients deposits to other banks who they do not trust to not go the way of RBS and Northern Rock, only in this case, it's that banks in Europe do not trust other banks with their client deposits in case banks go belly up (like Dexia and ABN Amro or Commerzbank). What the ECB has done is switch roles to lender of last resort to provide European banks with the money they won't lend to each other. Key point, as soon as a bank or Government accesses ECB funding it is because it is insolvent. The ECB provides only provides a bridging loan between the insolvent institution and its creditors with the lawyers and vultures picking meat off the carcass of the insolvent institution in the meanwhile. The ECB (and the Fed and and the Bank of England) is an enabler of banking profits (and staff bonuses) at the expense of society. It does have the advantage of being a private guaranteed monopoly. If you or I formed a trade association that rpinted vouchers and charged members one per cent per annum we would be arrested and sent to jail. If the ECB does it, it is legal and is another form of tax. The tax takes the form of higher interest charges levied on you and paid directly to bankers bonuses. The scare mongering of the banking monopoly implies that if you don't pay the bankers bonuses (extortion) you are going to lose everything you own. Your house, your job, your car, your pension, oh and your i-pad. The Governments support this creation of odious bridging loan (ECB) finance because they do not understand philosophy, economics, the law and have no moral fibre. Suck it up and buy real assets like gold that replace your bills and other outgoings like food, healthcare and utilities by buying shares in the companies that send you these bills until dividends cover each of these bills.

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Auntie Podes

Aug 20, 2012 at 10:52

Surely you now need to explain from whence the ECB gets its funds? I bet that they simply print them - the whole system is a rort.

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