Rabobank's Bas van Geffen has analyzed the potential impact of forthcoming structural Longer-term Refinancing Operations (LTROs) by the European Central Bank (ECB), suggesting these could help ease funding pressures as excess liquidity in the euro area declines [1]. The report notes that 12-month LTROs, likely to be auctioned via variable-rate tenders, may be introduced once demand for Main Refinancing Operations (MROs) reaches approximately €100-125 billion [1]. This threshold is based on historical data, where the smallest 3-month LTRO tender was €15 billion when MRO demand was structurally at least €100 billion [1].
Rabobank expects that the ECB could begin discussions about the design of structural LTROs towards the end of this year, with the timing of the launch ultimately dependent on banks’ demand for reserves [1]. The report also highlights that if the ECB moves forward with plans to raise the minimum reserve requirement, this could accelerate the timeline for LTRO discussions, potentially leading to a Governing Council debate in Q4 or early next year, and a launch later in 2027 [1].
From a market perspective, Rabobank argues that the introduction of structural LTROs may slightly flatten EUR money market term rates, though they are unlikely to fully offset the effects of ongoing quantitative tightening [1]. The operations are expected to be allotted primarily to banks facing the highest funding costs in term markets, which could lower the weighted average term funding rates [1]. However, Rabobank remains skeptical that LTROs will significantly compress Euribor-OIS spreads, citing the composition of the Euribor panel as a limiting factor [1].
The report underscores that various metrics of term funding availability and costs are being closely monitored as indicators of approaching liquidity inflection points. As quantitative normalization continues, Rabobank anticipates increased pressure on term rates, with LTROs potentially reversing some of this pressure [1].
CONCLUSION
Rabobank sees the ECB's potential structural LTROs as a tool to ease funding pressures as liquidity tightens, with the timing and design dependent on banks’ reserve demand and possible changes to reserve requirements. While LTROs may help flatten term rates, their impact on broader market spreads is expected to be limited. The market is watching closely for further ECB signals as liquidity conditions evolve.