The ECB’s latest announced form of stimulus is a third round of TLTRO issuance. Previous tranches of TLTROs have been 4-year loans primarily made to European banks that are active in lending to the private sector. The rate paid on the loans is reduced as more of the cash is lent out. However, as these loans come within a year of maturing, they will fall short of regulatory requirements and will incur greater costs to the banks. That tipping point is approaching for the first round of TLTRO II loans which were issued in June 2016, and the ECB is keen to create new funding for the banks such that funding will not collapse in June. Problem areas within European banking absorbed many of the loans; the top-left chart shows the high NPL ratios of Italian banks, which currently hold ~30% of outstanding TLTROs.

While M1 growth increased markedly after TLTRO I and was steady after TLTRO II (top-right chart), we cannot ignore the now-absent tailwind that QE provided at the time. Even a cursory look at the data suggests structural issues with the eurozone credit multiplier. In the bottom-left chart, we can see that the M2 multiplier has declined over the last 20 years but this has been especially sharp since 2014/15 when policy became very easy. Diminishing loans to households are corroborated by weak growth in the credit extended to non-financial corporates, despite strong demand.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception