Just like the first time around, the net gain from the LTRO when taking into account rolling off instruments, will be lower than the Gross amount. How much? According to SocGen, the final number by which the ECB's deposit account will increase will be about €210 billion less than the overhead number. From SocGen's Lauren Rosborough: "The LTRO outcome: €529.53bio was allocated to 800 institutions (compared with €489.19bio allocated to 523 institutions in Dec). The net increase, according to our economists, is €311bio (adjusted for yesterday’s MRO reduction, 3m LTRO allotment this morning, and the roll-off of the 3m and 6m LTROs tomorrow). The allocation was above our and at the upper end of the market range of expectations. After a brief and limited positive risk move (AUD/USD spiked to 1.0857), currencies are broadly unchanged and the EUR/USD is lower, possibly reflecting positioning unwinds. The LTRO outcome opens the way for further positive risk moves (high-beta, non-Japan Asia, lower DXY) but recent price action suggests to us that the rally is fatigued." Net: this means that following settlement, European banks will park not €500 billion but up to €810 billion with the ECB, on which they will collect 25 bps (while paying 1%, aka inverse carry as described here first [6]). It also means that in three years Europe's bank will have to not only pay the ECB €1 trillion in case (assuming there is no perpetual rollover of the LTRO, which there will be), but also delever by another €2.5 billion [7], for net asset drop of €3.5 trillion. Good luck building up shareholder equity by the same amount to offset unchanging liabilities.
But this is nothing new. What is, at least to Mario Draghi who openly refuted it at the last ECB press conference, is that banks are openly denying they used the second LTRO.
- ING GROEP DIDN'T TAP 3-YR ECB LOANS, SPOKESMAN SAYS
- ABN AMRO DIDN'T TAP ECB 3-YR LOANS
- ASR NEDERLAND DIDN'T TAP ECB 3-YR LOANS
- RABOBANK DIDN'T TAP 3-YR ECB LOANS
and the piece de resistance:
- King Says U.K. Doesn’t Need LTRO as Banks Have Enough Liquidity
But, but, why would they do that if there is no stigma. Hmmm Mario? Maybe, just maybe, and for the same reason why banks loathe to borrow money from the Fed's discount window, because there is.
We fully expect the "Long Non-LTRO bank, Short LTRO" bank pair trade to be the most profitable source of alpha for a long time.