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Coronavirus 22 Jun 2020

Demand explodes for ECB liquidity, to be used for business loans

Olga Gouveia, lead economist for Financial Systems at BBVA Research, wrote an op ed piece for the Spanish daily paper, Expansión, where she gave a positive appraisal of the European Central Bank liquidity auctions. The ECB auctions aim to increase lending in order to address the impacts of the COVID-19 crisis.

Last week, the ECB published information about the substantial demand for liquidity requested by eurozone banks during the fourth round of targeted longer-term financing, TLTRO III. According to Gouveia, this is due to the fact that “the terms offered have improved significantly, but also demand for business loans has skyrocketed, and in contrast with previous crises, banks are now better equipped to help financing reach those healthy companies that need it.”

Banks made more requests to the ECB than had been anticipated, and the amount they asked for — €1.3 trillion — exceeded previous rounds. BBVA Research explains that “of this, only €550 billion represents completely new financing; of the remaining €760 billion, there is financing restructuring from TLTRO II, and another (some €390 billion) equates to conversion from weekly auctions that were kicked off between March and June in order to avoid any kind of liquidity tension leading up to this auction.”

In total, “what we are talking about from the start of the COVID-19 crisis is approximately €900 billion in new funding” says Gouveia. The BBVA research economist explains what European banks are doing with this financing. The answer, in her opinion, is simple: giving business loans. Consequently, in March and April, “new business lending transactions in the eurozone reached €295 billion and €310 billion respectively, representing 25 percent and 30 percent growth compared to the same months last year,” With regard to stock, the increase has been impressive: specifically, “€117 billion in March and €73 billion in April, thus representing a 20-year monthly variation record,” Gouveia writes in her piece.

In addition, she stresses that “the breakdown by country proves to be a common trend defying stereotypical north-south differences. In March and April, business lending grew €64 billion in France, €35 billion in Germany, €34 billion in Spain, and €23 billion in Italy. Everyone is upping their credit, and so, in turn, also their appeals to the ECB.”

In short, “despite the severe crisis caused by COVID-19, it is encouraging to see that the measures that were instituted are yielding results: liquidity tensions have been avoided, the ECB programs are working, banks are asking the central bank for huge amounts in funding, governments are giving banks guarantees for the additional risk they are incurring, and also, the latter are doing their jobs, financing working businesses that have suffered disproportionately during the crisis,” she concludes.

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