Introduction

In accordance with Article 161(9) of Directive 2013/36/EU (“CRD”) and after consulting the ECB, the European Commission has prepared this report to the European Parliament and Council on the use and benefits of longer-term refinancing operations and similar funding support measures provided by ESCB central banks to credit institutions. This report takes into account the report which the European Banking Authority (EBA) submitted to the European Commission on 17 July 2014. This report must not be understood as opining on the exercise of the ECB'S and other Central Banks' monetary policy competences. In line with the mandate in the CRD this report assesses the use banks have made of past central bank funding support measures between 2011 and 2013 but does not assess the appropriateness of monetary policy operations.

The European Parliament and Council requested the Commission to report on the use and benefits of refinancing and funding support measures provided by several ESCB central banks to credit institutions between end 2011 and end 2013. Whereas the central bank funding operations were expected to have a positive impact on the real economy as a whole through increased lending to corporates and households, it was also argued that credit institutions could have benefited from this funding support to engage in other profitable transactions not related to household and corporate lending. In their mandate the co-legislators also invited the Commission to submit legislative proposals, if appropriate. These proposals would be aimed at limiting the possible opportunistic use of central banks' funding support measures by credit institutions.

Nature of the longer-term refinancing operations

The longer-term refinancing operations and similar central bank funding support measures assessed by the Commission in this report are refinancing operations with low rates of interest and exceptionally long maturities entailing generally the acceptance of a wider range of eligible collateral. The context of these measures was severe stress on bank funding markets in Europe at that time. Several banks, particularly in more vulnerable countries, were experiencing serious liquidity problems, as a combination of significantly impaired access to the wholesale funding market and outflows from retail deposits. This translated into high funding costs, high loan-to-deposit ratios and elevated liquidity risk. Against this background, the aim of these operations was to provide long-term funding to euro area banks. It seems very likely that without longer term funding support banks in more vulnerable countries would have been forced to de-leverage at a higher pace. The long-term funding support measures were defined by EBA and the Commission as funding provided to banks directly via ESCB central banks with an initial or planned maturity of more than 1 year.

Four long-term funding support measures have been analysed (see also Table 1):

1.(Two) 3-year long-term refinancing operations (LTRO) by the European Central Bank;

2.Denmark’s National Bank's 3-year loan facilities;

3.The Hungarian Central Bank’s 2-year variable rate collateralised loans and;

4.The 'Funding for Lending Scheme' by the Bank of England.

In total the ESCB central banks granted approximately the equivalent of EUR 1,080 billion of funding between December 2011 and December 2013. The two ECB 3-year LTROs in December 2011 and March 2012 represented more than 95% of the total longer-term refinancing measures in this period.

Table 1: Long term funding support measures – granted and paid back as at end 2013

Long term funding support measures Granted amount % GDP 2011 Paid back amount Outstanding amount (end 2013) ECB's longer term 3-year refinancing operations EUR 1,018bn 11% EUR 446bn EUR 572bn Denmark's National bank 3-year loan facilities DKK 60bn (EUR 7bn) 3% DKK 46bn (EUR 6bn) DKK 10bn (EUR 1.3bn) Hungarian Central Bank's 2-year variable rate collateralized loans HUF 122bn (0.43bn) <1% HUF 10bn (EUR 0.04bn) HUF 112bn (EUR 0.39bn) United Kingdom's Funding Lending Scheme GBP 44bn (EUR 53bn) 3% GBP 2bn (EUR 2.5bn) GBP 42bn (EUR 51bn) Total EUR 1,080bn EUR 455bn EUR 625bn

Source: EBA report and Commission calculations

methodological constraints to analysis of uses and benefits

The analysis of the use and benefits of funding support measures provided by central banks encounters a methodological problem, due to the “fungibility” of funding. This "fungibility" problem relates to the fact that it is not possible to "track the money" borrowed by banks from central banks to its ultimate use. The borrowed funding is not earmarked for any specific purpose but is used interchangeably with other sources of funding to support a range of activities. EBA explained in its report that the "fungibility" problem precluded a precise quantification of the use and benefits of the central banks’ funding. To circumvent this issue, EBA adopted a qualitative approach based on questionnaires addressed to the relevant central banks and supervisors. Although this method has its merits, unfortunately it does not allow robust conclusions to be drawn on the use and benefits of these long-term refinancing operations.

In order to overcome this "fungibility" constraint, the Commission attempted to develop a more quantitative analysis of changes in the balance sheets of national banking systems during the period when funding support was provided. However, this proved unsuccessful in delivering more detailed reliable insights into the actual use of the LTRO funding support measures by banks in the Eurozone.

During the period of the LTRO funding support measures there was on aggregate a slight de-leveraging of the Euro area banking system of EUR 568 billion (with equally shares of de-leveraging of banks' sovereign debt holdings and corporate lending of approximately EUR 250 billion each) on a total of Euro area balance sheet of approximately 33.000 billion (1.7%).

So whilst the approach identified variations in the asset and liability side of the aggregate balance sheet of national banking systems, it only permits the drawing of limited conclusions. This is particularly the case because it is not known how credit institutions would have behaved without recourse to longer-term central bank refinancing facilities. In short, there is no reliable counterfactual as to how banks would have acted in the absence of these measures. The approach followed therefore cannot provide an overall appraisal of the use and effectiveness of the LTRO support measures. The Bank of England, for example, judged that at the outset of the "Funding for Lending Scheme”, the situation was such that lending was more likely to decrease than increase, but without any great certainty .