ECB: On The Credit Wave Towards Zombification


19-08-20 08:48:00,

Authored by Gunther Schnabl via The American Institute for Economic Research,

When Christine Lagarde, president of the European Central Bank, reecently invited European youth on Twitter to help shape the future of the euro, she was swamped by a wave of criticism.

Most of the responses contained the hashtag #bitcoin, revealing a certain distrust against the euro, the ECB and Christine Lagarde.

Indeed, the asset purchase programs of the ECB have pushed up asset prices, making it difficult for young people to buy a home or build up wealth. As we will show, the so-called (Targeted) Longer-term Refinancing Operations ((T)LTROs) further zombify the European economy and deteriorate the real income prospects of young Europeans.

Outstanding Refinancing Operations of the ECB

Source: ECB and own calculations. See Schnabl and Sonnenberg (2020).

(T)LTROs – are the second important monetary policy instrument of the European Central Bank. On 24 June 2020, euro area banks raised €548 billion in additional loans in the fourth round of the Targeted Longer-Term Refinancing Operations III (TLTRO-III) (Schnabl and Sonnenberg 2020). The stock of outstanding long-term loans, most of which now have a maturity of three years, has jumped to about €1,600 billion (see chart). The ceiling is currently set by the ECB at 50% of the sum of the commercial banks’ outstanding loans to companies and households (excluding real estate loans) as of February 2019. This implies a credit limit for (T)LTRO loans of around €3,000 billion (Lagarde 2020).

Most of the outstanding long-term loans are distributed among four countries (as of the end of June): Italian and French banks accounted for 22% each, German banks for 18% and Spanish banks for 16%. Thus, the ECB does not seem to follow a country distribution according to her capital key when granting longer-term loans. Moreover, given full allotment, the allocation policy seems to be driven by the demand of the individual banks. To ensure that banks with higher risks have access to long-term refinancing operations, the collateral requirements were relaxed on 7 April 2020 (European Central Bank 2020). 

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