Divyang Shah, Senior IFR Strategist
The analysis first focuses on a survey of why banks are repaying early and finds
1) the decision for early repayment is based on funding positions of banks
2) those banks retaining LTRO funds are doing so because of attractive pricing or simply wanting to maintain liquidity buffers.
What is of interest is that the ECB implies that the excess liquidity threshold is €100-200bn beyond which EONIA rates move from being slightly above the deposit rate. Market consensus has rested on this figure being €200bn, but we think the actual figure is closer to the ECB’s lower bound of €100bn. The ECB points out that after the initial higher than expected repayments, the market settled down as repayments averaged €5.2bn per week.
The ECB says that expectations of future levels of excess liquidity have stabilised which is also inferred from the limited impact of 3-year LTRO repayment announcements on the EONIA forward curve. Instead of LTRO repayments, the key driver on excess liquidity calculations has been autonomous factors.
This highlights that in addition to watching the weekly 3-year LTRO repayments we need to keep an eye on much broader money market factors.
If and when excess liquidity starts to threaten €200bn it is likely that the ECB will look at providing more in the way of longer term LTROs. For now it’s about keeping the powder dry just in case the eurozone gets dragged along for the Fed QE tapering ride.
