What is TLTRO-II?

24 June 2016

Targeted longer-term refinancing operations (TLTROs) are one of the ECB’s non-standard monetary policy tools. Through TLTROs we provide long-term loans to banks and offer them an incentive to increase their lending to businesses and consumers in the euro area. This helps to return inflation rates to levels below, but close to 2% over the medium term. The first TLTRO series was launched in 2014. The second one, introduced in March 2016, is called TLTRO-II.

Banks participating in TLTRO-II can borrow an amount up to 30% of their outstanding loans to businesses and consumers. This means that banks that lend more to the real economy will be able to borrow more and at a lower interest rate than the ECB usually offers. There will be four operations over the next twelve months, with the first one starting on 29 June 2016.

How does TLTRO-II differ from usual monetary policy operations?

Acting as a bank for banks, a central bank provides commercial banks with liquidity through loans. Banks usually have to pay these loans back within one week or three months. Here is the main difference: the loans under TLTRO-II have a much longer maturity of four years. This provides banks with stable and dependable funding in times of market uncertainty.

Furthermore, unlike in usual monetary policy operations, the amount of money that the banks can obtain through TLTRO-II and the cost of borrowing depend on the amount of loans they provide to the real economy.

How does this help consumers, businesses and the economy?

By providing incentives for banks to lend more, TLTRO-II encourages lending to businesses and consumers in the euro area, which boosts economic activity. Banks usually pay the main ECB interest rate on the amount borrowed. This is initially also the case here, but in TLTRO-II the cost of borrowing is linked to how much participating banks lend: if a bank sufficiently improves its lending to the real economy, instead of having to pay interest, it can receive interest by ‘paying’ a negative rate. This rate can be as low as the deposit facility rate, currently at -0.4%.

TLTRO-II works together with the ECB’s other accommodative policies and supports their transmission to the real economy. This helps us to achieve our main objective of price stability.