Eurozone banks are set to repay €296 bln in loans to the European Central Bank next week, the ECB said on Friday, the biggest cash withdrawal from the euro zone’s financial system in the euro’s 22-year history, according to Reuters.
The move is part of ECB efforts to fight record-high inflation in the eurozone by raising the cost of credit and it is its first step towards mopping up even more liquidity next year by trimming its multi-trillion-euro bond portfolio.
The eurozone’s central bank said lenders would repay €296 billion worth of the €2.1-trillion multi-year credit they have taken under its Targeted Longer-Term Refinancing Operations (TLTRO) when they get their first chance to do so on November 23.
This is less than the half a trillion euros that analysts were expecting but still the biggest drop in excess liquidity since records began in 2000.
The one-week ESTR rate, which measures borrowing costs for banks after the repayment goes through, fell after the ECB’s announcement, as did yields on Italy’s two-year government bonds, albeit briefly.
ECB policymakers will look at how the market digests this sudden drop in cash to gauge how fast they can proceed with reversing the ECB’s €3.3-trillion Asset Purchase Programme, which they will discuss at their December 15 meeting.
“These sizeable early repayments reduce the Eurosystem balance sheet and thereby contribute to the overall normalisation of monetary policy, which is needed to bring inflation back to target over the medium term,” ECB board member Isabel Schnabel said on Twitter.
This is the first voluntary repayment window so analysts had cautioned that some bank treasurers may choose to wait until the next one on December 21 to have better visibility on the state of their balance sheet before year-end results.
While this early TLTRO reimbursement is voluntary, the ECB has given banks an incentive to get rid of those loans by taking away a rate subsidy last month.
The greatest impact from the repayments was likely to be seen in peripheral countries, which would see a bigger proportion of their government bonds come back on the market after being locked at the ECB as collateral for the TLTRO loans.