ECB’s TLTRO still attractive in the QE context

On 19 March, the ECB will carry out its third TLTRO. Although the PSPP has overshadowed the importance of TLTRO with respect to liquidity provision, the outcome is expected to provide meaningful insight into the likely evolution of bank balance sheets, including their lending activities into the real economy, in the next few quarters.

Barclays notes in a report on Tuesday:

• We expect a take-up at about €35bn at this week's operation, but given the positive indications of lending demand from the latest ECB lending survey, we see risks as skewed to the upside.
  
  
• We think it is important to note that PSPP is an asset swap programme that does not provide banks with new liabilities that could fund assets on their balance sheets. 
  
  
• Liquidity from QE can only be used to pay down existing liabilities or be swapped for assets held by another bank within the system (including loans).