REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the use and benefits of longer-term refinancing operations and similar funding support measures provided by ESCB central banks to credit institutions
Date: 2016-07-12
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: European System of Central Banks, auditing, central bank, credit, credit institution, financial transaction, investment company, right of establishment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 12.7.2016  COM(2016) 455 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the use and benefits of longer-term refinancing operations and similar funding support measures provided by ESCB central banks to credit institutions   
 
 
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 20141. 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.  

1 https://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-07+-
+Central+banks+funding+support+measures.pdf 

2 

 
 
                                                            
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%2 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) 

EUR 1,018bn 

11% 

EUR 446bn 

EUR 572bn 

ECB's longer term 3-year 
refinancing operations 
Denmark's National bank 3-year 
loan facilities  
Hungarian Central Bank's 2-year 
variable rate collateralized loans 
United Kingdom's Funding 
Lending Scheme 
Total 

DKK 60bn 
(EUR 7bn) 
HUF 122bn 
(0.43bn) 
GBP 44bn 
(EUR 53bn) 
EUR 1,080bn 
Source: EBA report and Commission calculations 

3% 

<1% 

3% 

DKK 46bn 
(EUR 6bn) 
HUF 10bn 
(EUR 0.04bn) 
GBP 2bn 
(EUR 2.5bn) 
EUR 455bn 

DKK 10bn 
(EUR 1.3bn) 
HUF 112bn 
(EUR 0.39bn) 
GBP 42bn 
(EUR 51bn) 
EUR 625bn 

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 

2 As measured by overall gross amount granted 

3 

 
 
                                                            
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 certainty3.  

THE BENEFITS OF LONGER-TERM REFINANCING OPERATIONS FOR BANKS  

The European  Parliament  and Council  mandate  also asks whether and how  ESCB central  bank 
longer-term  refinancing  operations  have  led  to  benefits  for  banks.  Leaving  aside  the  advantage 
for  banks  arising  from  increased  liquidity  leading  to  lower  yields  on  newly-issued  bonds,  the 
question  of  the  benefits  of  the  long  term  support  measures  depends  on  the  use  to  which  these 
funds  are  put  by  banks.  As  already  pointed  out  in  terms  of  the  likely  benefits  for  the  real 
economy, it is impossible to draw definitive conclusions on the use of such funds in the absence 
of  a  reliable  counterfactual.  Consequently,  the  extent  to  which  central  bank  refinancing 
operations  have  been  used  by  banks  to  engage  in  “carry-trades”  (i.e.  using  low-cost  funding 
available through these refinancing operations to purchase higher-yielding sovereign debt) cannot 
be ascertained.  

Nevertheless,  some  benefits  of  longer-term  refinancing  operations  can  be  roughly  estimated  in 
terms of funding spreads, for instance, by comparing the funding cost of support measures (e.g. 
1%  p.a.  for  the  3-year  LTROs)  with  the  yield  on  the  bank's  debt  securities  during  the  LTRO 
funding. However, it is not possible to estimate the overall profit from carry-trade operations as, 
once  again,  it  is  not  possible  to  determine  precisely  the  amount  of  funds  from  the  longer-term 
refinancing  operations  that  has  been  used  to  finance  carry-trades.    It  should  also  be  noted  that 
these carry trades were not risk-free operations, as sovereign default was at least for some time a 
contingency with a non-zero probability. 

In  order  to  maximise  the  allocation  of  funding  to  specific  "uses"  and  avoid  the  "fungibility" 
problem,  the  Hungarian  Central  Bank  and  the  Bank  of  England  have  implemented  support 
measures whose characteristics were individualised and depended on the lending behaviour of a 
credit  institution.  In  particular,  the  UK  "Funding  for  Lending  Scheme"  was  designed  to 
encourage  lending  to  the  non-finance  sector  of  the  economy  by  linking  both  the  price  and 
quantity  of  long-term  cheap  funding  to  bank  performance  in  lending  to  this  sector  of  the 
economy. Participating banks and building societies were able to borrow up to 5% of the stock of 
their existing lending to the non-finance sector of the economy. This could be topped up by the 
amount of the net  expansion  of lending during  a reference period (from end-June 2012 to end-
December  2013).  Furthermore,  the  price  of  funding  under  the  "Funding  for  Lending  Scheme" 
(FLS) varied as a function of the net lending by each beneficiary bank (as compared to end-June 
2012) so as to encourage banks to lend to the non-finance sector of the economy. For banks that 
expanded their net lending as compared to end-June 2012, all borrowing from the FLS was at the 
lowest available rate of 25 bps per year. Conversely, banks that reduced their stock of loans had 
to  pay  an  additional  25bps  for  each  percentage  point  fall  in  their  lending  up  to  a  maximum  of 
150bps.  This  system  of  incentives  is  likely  to  increase  the  probability  that  the  funds  borrowed 
from central banks benefit lending to the wider economy.  

Similarly, the ECB quarterly TLTROs (Targeted Longer Term Refinancing Operations) which is 
not  assessed  here  and  which  was  available  from  September  2014  onwards4,  use  similar 
techniques to link the volume of borrowing to the volume of lending to the non-finance sector of 

3 EBA's report (p. 22) 
4 Quarterly TLROs will be conducted from September 2014 to June 2016  

4 

 
                                                            
the  economy5.  In  contrast,  the  two  3-year  LTROs  –  with  a  fixed  rate  of  1%  –  did  not  have 
specific  incentives  or  mechanisms  linking  central  bank  funding  with  bank  lending  to  the 
corporate, SME and household private sectors.  

CONCLUSION 

Article 161(9) of the CRD invites the Commission to submit, together with this report on the use 
and  benefits  of  longer-term  refinancing  operations  and  similar  funding  support  measures 
provided  by  ESCB  central  banks  to  credit  institutions,  a  legislative  proposal,  if  appropriate 
effectively curbing the possible opportunistic use of central bank liquidity support measures by 
banks. However, the theoretical and practical limits posed by the "fungibility" of funding sources 
does not allow a reliable identification of the use of ESCB funding support measures by banks. 
This  renders  it  impossible  to  identify  and  quantify  with  any  degree  of  confidence  the  profits 
attributable to possible opportunistic behaviour by credit institutions facilitated by such funding 
support. In conclusion there is no sound empirical basis to justify a legislative proposal from the 
Commission  to  the  European  Parliament  and  Council  on  this  subject.  Finally,  the  Commission 
notes and indeed welcomes the fact that the more recent ECB Targeted LTRO program provides 
incentives for banks to lend to the non-financial private sector.   

5 For the first two operations, banks were thus allowed borrow up to 7 per cent of their portfolio of loans to 
the non-financial private sector (excluding loans for house purchase) 

5