European Central Bank: Structural LTROs could ease funding pressure - Rabobank

Rabobank's Bas van Geffen has analyzed the potential impact of upcoming structural Longer-term Refinancing Operations (LTROs) on the European Central Bank's (ECB) funding pressure. The report suggests that 12-month LTROs, which may be auctioned using variable-rate tenders once Main Refinancing Operations (MROs) demand reaches approximately €100-125 billion, could slightly lower EUR money market term rates.

However, these LTROs are unlikely to fully counteract the effects of quantitative tightening. The ECB may begin discussions about the design of structural LTROs by the end of this year, but the launch date depends on banks' need for reserves. If the ECB decides to raise the minimum reserve requirement, the Governing Council could discuss this in Q4 or early next year, with a launch potentially occurring later in 2027.

The launch date hinges on banks' demand for reserves. Historically, LTROs could start when MRO demand reaches €100-125 billion, with the smallest 3-month LTRO tender being €15 billion when MRO demand was at least €100 billion. LTROs may be allocated to banks with the highest funding costs in term markets, potentially lowering weighted average term funding rates.

However, the composition of the Euribor panel may prevent a meaningful compression of Euribor-OIS spreads.