Document Type

Case Studies


The announcement of the three-year Long-Term Refinancing Operations (LTROs) by the European Central Bank (ECB) on December 8, 2011, signaled the beginning of the largest ECB market liquidity programs to date. Continued and increasing liquidity-related pressures in the form of ballooning financial market credit default swap (CDS) spreads, Euro-area volatility, and interbank lending rates prompted a much more forceful ECB response than what had been done previously. The LTROs, using a repurchase (repo) agreement auction mechanism, allowed any Eurozone financial institution to tap essentially unlimited funding at a fixed rate of just 1%. Because the three-year LTROs were so similar to their shorter-maturity counterparts, the types of eligible collateral were almost identical, though the three-year operations were slightly less strict with the types of asset-backed securities (ABS), loans, and debts that could be pledged. The first operation, conducted on December 22, 2011, saw 523 banks draw €489.2 billion in funding, and the second operation, finalized on February 29, 2012, saw 800 banks draw €529.5 billion. Much of the liquidity, rather than being put into private credit markets, was placed at the ECB deposit facility to supplement the interbank lending market. Banks that were more vulnerable to a credit crunch, often located in peripheral countries such as Spain and Italy, tended to use the facility more and also drove the increase in the supply of private credit. Less at-risk institutions tended to engage in “reach-for-yield” strategies with debt from riskier sovereigns. Post-crisis evaluations were mixed, but analysts tend to agree that the facilities helped ease the initial shock in the Euro-area money market and reduce the impact of the credit crunch on the broader economy.