Banks take €233.5 billion in ECB free loans with QE exit in mind

Bloomberg

The European Central Bank gave euro-area banks 233.5 billion euros in its last offer of free long-term cash, the largest net amount since the program was launched.
Banks’ interest in Targeted Longer-Term Refinancing Operations (TLTRO) — four-year loans at a rate that starts at zero and could go lower — increased as the economic recovery spurs calls for an exit strategy from ECB stimulus. The take-up by the 474 bidders in the final scheduled operation compares with a median estimate of 110 billion euros in a Bloomberg survey, though predictions ranged from 30 billion euros to 750
billion euros.
The large take-up gives the ECB an insight into lenders’ expectations about the path toward the end of a stimulus spree that also includes negative rates and 2.28 trillion euros in asset purchases. While current guidance foresees a significant pause between the end of the ECB’s bond-buying program and the first rate increase, some ECB policy makers have said that gap could be shortened or the sequence reversed.

Italian Bids
Italian lenders were among those that chose to lock-in cheap funding. BPER Banca SpA took up 4.1 billion euros, according to a bank official, while Banco BPM SpA bid for 3.1 billion euros, a spokesman said. Unione di Banche Italiane SpA, Credito Valtellinese SC and Banca Carige SpA also took part in the round, taking up 2.5 billion euros, 1 billion euros and 500 million euros respectively.
The ECB started its first series of TLTROs in September 2014, with a second series on more lenient terms getting under way last year. The 12 operations have delivered a net 834 billion euros to lenders.
While the euro area has posted 15 quarters of economic growth and seen inflation climb to 2 percent, officials are wary of declaring victory. The growth in consumer prices is largely driven by energy, with core inflation subdued and hard data such as industrial production volatile.

Even so, a debate is brewing over how and when stimulus can be withdrawn. Some policy makers raised the issue of sequencing at the March 9 Governing Council meeting, signaling nascent pressure to begin an official discussion on normalization sooner rather than later. Governors including Austria’s Ewald Nowotny and Italy’s Ignazio Visco have stated publicly that the current forward guidance could be reviewed.
Rate Probability
Investors have taken notice and are now pricing in a more than 50 percent probability of an increase in the deposit rate — currently at minus 0.4 percent — by December. A month ago, the chance was just 11 percent.
That’s a mixed blessing for the ECB. While it’s a sign of confidence, speculation over a rate increase pushes up market borrowing costs and so threatens to weigh on the economy. At a time when the euro-area faces political risks from elections, British plans to leave the European Union, and the U.S. administration’s disdain for global trade rules, that’s an unwelcome complication.
Yet banks, which have seen their profitability squeezed by negative rates, could welcome a tightening that gives them room to boost their loan rates, and that adds to the incentive to lock in the cheap four-year funding offered by the TLTRO now.
“It turns out the ECB hasn’t properly thought through its exit strategy from stimulus yet, despite what was implied in its guidance,” Richard Barwell, an economist at BNP Paribas Investment Partners in London, said before the allotment. “In a situation where markets think rates might rise sooner, TLTROs are a license to print money for the banks.”