TLTRO Update

Dutch banks meet targets and insure themselves of cheap funding for another 3 years



In an article in December, we discussed the background of the TLTRO discounts on interest margins, as offered by the banks in 2021. In order to qualify for the lowest funding rate at the ECB, the participating banks achieve the lending performance target of 0% in the period between October 1, 2020 and December 31, 2021.


Deposit Facility Rate


Now that ABN, ING and Rabo have published their fourth quarter figures, we can conclude that all three banks have achieved the target and continue to benefit maximum from the interest rate advantage associated with TLTRO. Where ABN cautiously formulates: “Now that we have met the benchmark, it can be reasonably expected that an additional discount of 50bps on the borrowing rate will be guaranteed for the period June 2021 to June 2022.”


The discount of 50bps is the discount on the Deposit Facility Rate, which is currently 0.5% negative. ABN, ING and Rabo are currently paying a negative interest of 1.0% on their TLTRO funding. That the ECB continues to think along with the banks to stimulate lending is apparent from the latest press release on the ECB's monetary policy: “The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance. As announced, it expects the special conditions applicable under TLTRO III to end in June this year. The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks' intermediation capacity in an environment of ample excess liquidity.”


'Call for the final round'


We also pointed out in December that the 'call for the final round' still had to ring on December 22.


We can now find in the ECB's Statistical Data Warehouse that on December 22, 2021, EUR 51.9 billion in TLTRO funding was allocated to 159 banks. The chart below shows the total of all 10 TLTRO III tenders, including their amortization schedule. This shows that the outstanding TLTRO funding will peak at EUR 2,112 million as of December 22, 2022 and will remain at this high level for a long time. There will only be a substantial repayment in June 2023, after which EUR 800 million remains.


Source: ECB, EURO tender operations (amounts times EUR 1 million)


The ECB does not state which banks are participating and how the funding is distributed among the participating banks. Rabobank was the first to publish its annual figures. In this we can read that Rabobank has increased its participation in the TLTRO program by EUR 15 billion to EUR 55 billion in 2021. We have to wait for the annual figures of ABN and ING to see how their participation in the TLTRO funding has developed.


It is certain that the three large Dutch banks have achieved the ECB target, which means that they have a very large TLTRO funding portfolio. Without a new TLTRO program, this funding will run out over the next three years. Until the end in June 2022, the banks will pay a negative interest rate of 1% on this, after which they will revert to the Deposit Facility Rate (the lowest rate that the ECB has in its monetary policy).


Meanwhile, we see in the market that long-term interest rates are rising rapidly because there is consensus that the current inflation will largely not be a temporary phenomenon. As short-term interest rates are still firmly fixed (3-month Euribor still < -0.50%) the yield curve steepens. There are also the first signs of increasing credit margins in the public market. In other words, that stock of cheap funding may come in handy. About the market developments mentioned above we will publish soon.