According to the ECB, banks in the eurozone are due to repay nearly €300 billion to the ECB on Wednesday. This is the biggest cash drain from the eurozone financial system in the 22-year history of the euro.
The repayments will come as part of a €2.1 trillion multi-year loan taken out by banks under its targeted long-term refinancing operations (TLTROs)
Why does the ECB require this?
It is part of the ECB’s efforts to fight record-high inflation in the eurozone. In addition to raising the cost of borrowing, it is the ECB’s first step towards draining even more liquidity next year by reducing its multi-trillion-euro bond portfolio.
At first glance, this may also appear to be a kind of test of how the current economy will react to such capital outflows. Depending on the market’s reaction, it then remains to be seen how quickly the ECB can proceed with the withdrawal of the €3.3 trillion asset purchase program that will be discussed on 15 December.
ECB Executive Board member Isabel Schnabel commented on the situation on her Twitter account.
Today the @ecb published that banks will repay €296.3 billion (14%) of their TLTRO III borrowing early, on 23 November 2022. This is the first early repayment possibility available to banks after the 27 October Governing Council decision to recalibrate TLTRO III conditions. 1/2 pic.twitter.com/YM90XUdhd9
— Isabel Schnabel 🇪🇺🇺🇦 (@Isabel_Schnabel) November 18, 2022
The possibility of repayments is in 2 dates
However, Wednesday 23 November is only the first date when banks can resort to this voluntary repayment. Although the ECB recommends not to delaying the repayment too long, banks can opt for a later date.
The second deadline will be 21 December, when an even larger repayment is expected. The reason is simple, banks will want to have an overview of their balance sheet ahead of the year-end results, so they will wait to make a larger repayment.
Another area of focus for the ECB is money markets, where banks lend to each other for short periods. These markets have been hampered by ECB policy for years because banks could not find high-quality bonds to use as collateral for loans, or even had no incentive to do so when they could simply use TLTROs for subsidized loans.