ECB begins major cash clean-up as banks repay 296 billion euros in loans

  • Reimbursement much lower than expected
  • The key money market rate drops after the announcement
  • Moving seen as a first step towards the unwinding of obligations

FRANKFURT, Nov 18 (Reuters) – Eurozone banks are expected to repay nearly 300 billion euros ($310 billion) in loans to the European Central Bank next week, the ECB said on Friday, the biggest withdrawal liquidity of the euro area financial system in the 22-year history of the euro.

The move is part of the ECB’s efforts to tackle record inflation in the eurozone by raising the cost of credit and is its first step to mopping up even more liquidity next year by reducing its bond portfolio by several trillion euros.

The eurozone central bank said lenders would repay 296 billion euros of the 2.1 trillion euros in multi-year credit they took out under its targeted long-term refinancing operations (TLTROs). when they get their first chance to do so in November. 23.

That’s less than the half-trillion euros analysts expected, but it’s still the biggest drop in excess liquidity since records began in 2000.

The one-week ESTR rate, which measures borrowing costs for banks after repayment, fell after the ECB announcement, as did yields on two-year Italian government bonds, albeit briefly.

ECB policymakers will look at how the market is digesting this sudden drop in liquidity to gauge how quickly they can reverse the ECB’s €3.3 trillion asset purchase program, which they will discuss at their December 12 conference. 15 meeting.

“These large prepayments reduce the balance sheet of the Eurosystem and thus contribute to the overall normalization of monetary policy, which is necessary to bring inflation back to the medium-term objective”, said Isabel Schnabel, member of the executive board of the ECB, on Twitter.

This is the first voluntary redemption window, so analysts had warned that some bank treasurers may choose to wait until the next one on December 1. 21 to have better visibility on the state of their balance sheet before the year-end results.

“The December redemption window may well see even larger redemptions,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, estimating redemptions at 900 billion euros in that window.

Although this early redemption of the TLTRO is voluntary, the ECB prompted banks to get rid of these loans by removing a rate subsidy last month.

The greatest impact of redemptions was likely to be seen in peripheral countries, which would see a greater proportion of their government bonds return to the market after being blocked at the ECB as collateral for TLTRO loans.

The other area of ​​interest for the ECB is the money market, in which banks lend to each other for a short period.

These markets have been hampered by ECB policy for years as banks either could not find high quality bonds to use as collateral to borrow or had no incentive to do so when they could simply mine the TLTRO for subsidized loans.

Antoine Bouvet, strategist at ING, said the lower-than-expected reimbursement “deals a blow to hopes for short-term relief” from the scarcity of collateral.

He and Ducrozet both said the ECB may have to introduce a new long-term funding facility for banks, albeit on less generous terms, if banks are in trouble.

($1 = 0.9647 euros)

Reporting by Francesco Canepa; Editing by Paul Simao and Toby Chopra

Our standards: The Thomson Reuters Trust Principles.

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