Banks: TLTRO II: An inconvenient truth

TLTRO II had, has and will have many implications related to funding, be it in terms of mix or costs. This extraordinary measure meant to replenish interest margins will reach maturit y in a matter of time (from June 2020 to March 20 21); early repayments possible even sooner from June 2018 to March 20 19. At first sight, TLTRO II is a cure-all windfall in many respects. With hindsight, TLTRO II could well turn into backlash if not managed properly, in a timely fashion and with foresight. Three options are available to banks: 1) refunding TLTRO II without any preparation besides match-lending and investments, 2) building up liquidity in order to replace TLTRO II funding by others means (either deposit collection, ECB borrowings incl. repo, MRO and not to forget wholesale funding) or 3) advocating for a TLTRO III. The last option is by far the most accommodative but is all about political bargaining… One unknown remains: do banks intend to fully refinance TLTRO II? Most decline to answer . Before effectively materializing, TLTRO II reimbursements will translate into LCR and NSFR downward corrections. LCR relates to short-term liquidity needs whereas NSFR is about available stable funding. Both are bound to decrease. Liquidity buffers will be consumed to honor TLTRO II payments both at the level of numerator (liquidity buffer) and the level of the denominator (net outflows), while available stable funding will plummet as soon as it become s due in a year (50 %) to finally account for 0% when it becomes due in 6 months . For these reasons, TLTRO II refinancing is on the agenda and a soon-to-be priority. 2019 will be a turning point especially first from Jun 19 and then Dec-19 onwards since TLTRO II available funding will start being discounted from a NSFR standpoint. Based on the general feeling that national c hampions, Tier 1 banks and core- country banks resorted to TLTRO II so as to rebuild margins, mid-sized to small banks primarily to avoid costly wholesale funding, we set minimum TLTRO II to be refinanced. Covering 100% of TLTRO II with fresh funding is extreme; far from necessary in some cases . The report explores the state-of-play for liquidity positions at sector-wide, country- and bank- level and, accordingly, potential behavior patterns in the banking sector addressing TLTRO II redemptions. Take- aways largely differ from one bank to another even within the same country. The focus is once again on Italy no matter the size and the reputation of the bank. TLTRO II roll-over will undergo material costs in some cases, entailing a non-negligible NIM impact . Repo might appear as the cheapest alternative albeit its negative impact on NSFR/LCR ; LTRO is another mean to limit interest expenses; deposit growth is the perfect fit for LCR/NSFR even if they will come with an extra-cost owing to commercial initiative to attract customers ; and long-term wholesale funding abides by LCR/NSFR principles provided tenors exceed 1 year . Relying on a holistic approach and connecting the dots, TLTRO II is certainly poised to transpose into funding mix adjustments and lesser benefits from rate hikes since ref inanced at higher cost of funds . € 65 bn-€ 136 bn (partial refinancing vs. full-refinancing see opposite ) net supply of covered bonds, preferred sen ior or non-preferred senior within a sample of 31 bank s which subscribed more than €552bn of TLTRO II . Once again, conclusions lead us to have a very cautious stance on Italy .