European banks are facing a cash flow crisis of $1.2 trillion. In particular, they have to pay back about €478 billion of ultracheap loans issued by the European Central Bank (ECB). What’s more, they have to be paid back by the end of June. In fact, the loans were part of a program, known as targeted longer-term refinancing operations (TLTROs). However, the program is coming to an end. Therefore, they could increase the pressure on more fragile eurozone banks and economies.
JPMorgan analysts estimate that European banks will borrow roughly €150 billion this year to replace the loans and Italian banks will be monitored closely. Italy is responsible for almost 30 percent of the unpaid TLTROs. But the truth is that they don’t have enough extra cash deposited at central banks to cover the repayments. So, the impact is likely to be greater on smaller banks that have less market access.
Attempt to Strengthen the Economy
Since 2014, the ECB‘s efforts to strengthen the economy have heavily relied on obtaining low-cost long-term funding. While simultaneously having years of rock-bottom interest rates and massive bond purchases. The TLTROs were designed to encourage banks to lend more to businesses and households. So those loans would grant them access to funding at a low cost over an extended period.
“Strong Banking System”
Some banks state that they are certain that the current banking system is strong enough to overcome this. Over the years, the stability of funding for European banks has improved. Rather than depending on volatile wholesale markets, they are relying on a relatively steady source of funding. So, relying more on customer deposits is a good example of that. However, specialists are worried that the end of the TLTROs program could increase borrowing costs. Especially for banks, which could, in turn, drive up interest rates and slow down the economic recovery.
Added Pressure
The European banking sector is already grappling with a range of challenges. Those challenges include a low-interest-rate environment, regulatory pressures, and increasing competition. So, the end of the TLTROs program will only add to these pressures. Particularly for smaller banks with weaker market access.
Finance Options
To mitigate the impact of the cash flow crisis, some banks may choose assets to raise funds. However, this could have unintended consequences. If banks decide to sell their government bonds, they could be driving up interest rates. Therefore, this could create obstacles for companies and households to obtain loans in the future.
ECB’s Support
The ECB has indicated its intention to maintain low-interest rates in order to sustain the economy of the eurozone. They have also stated to support the eurozone by continuing to buy government bonds. Thus, it remains to be seen whether this will be enough to offset the impact of the end of the TLTROs program.
To Sum Up
The end of the TLTROs program presents a significant challenge for European banks. Particularly for smaller banks with weaker market access, it’s a big challenge. Therefore, the impact of the liquidity crunch could be felt across the eurozone economy. The higher borrowing costs could potentially slow down the economic recovery. So, banks will need to be proactive in managing their liquidity positions and exploring alternative funding sources to weather the storm.