Long-term refinancing operations (LTRO)
The Long-term refinancing operations (LTRO) of the European Central Bank (ECB) are designed to provide stability to Europe’s banking sector.
The Long-term refinancing operations (LTRO) of the European Central Bank (ECB) are designed to provide stability to Europe's banking sector and keep sovereign bond yields down to sustainable levels (below 6% in the case of Spain). The mechanism is the ECB supplying funds to the banks at 1% for up to three years.
The banks in turn have to post collateral to secure these funds. The lower the quality of this collateral, the bigger the haircut' ie, the lower the amount that can be borrowed. These funds can find their way into sovereign bonds, which carry a higher yield than 1%, allowing the bank to make a profit on the exercise. This buying should also push up prices and force down yields.
Another possibility is the banks hoard the money by putting it back on deposit at the ECB (at a lower rate). It can then be use to repay private funding at a later date. The least likely option is the money is lent out to firms and individuals, most of whom are currently debt-averse.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Watch Tim Bennett's video tutorial: What is the LTRO?
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Twenty 'finfluencers' questioned under caution by the UK regulator
The individuals were interviewed voluntarily using the Financial Conduct Authority’s criminal powers
By Chris Newlands Published
-
Number of ISA millionaires triples in three years
The number of people with £1 million in their ISAs has tripled in three years to reach 3,180. But could next week’s Budget put an end to future ISA millionaires?
By Ruth Emery Published