TLTRO in the context of ECB policy normalisation

TLTRO repayments and redemptions will drive incoming ECB passive QT over the next few quarters. So far, banks have repaid a small amount of liquidity, while the ECB’s recent decision on remuneration of excess reserves has helped keep current excess liquidity abundant, aiming at a smooth transmission of its monetary policy.

TLTRO borrowing played an important role in lifting the ECB balance sheet following the outbreak of the pandemic crisis, accounting for roughly 40% of the overall increase since February 2020, with QE, mainly through PEPP, making up the rest. Consistent with these trends, Eurozone excess liquidity increased by €2.8tn, corresponding to roughly 70% of the overall balance sheet expansion.

Before the pandemic, TLTROs outstanding amounted to some €600bn, mainly related to funding needs. Out of the following €1.6tn increase, roughly 25-30% was probably due to increased funding needs linked to lending activity, purchases of government bonds, and replacement of existing unsecured borrowing with TLTRO liquidity, while the remaining part appeared to be related to opportunistic borrowing.

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