This week’s three-year ECB LTRO (i.e. long-term refinancing operation) should lead to a substantial increase in lending to the banking system, thereby pushing Eurozone and G7 bank reserves to new records.
 
The ECB’s first 12-month LTRO conducted in June 2009 resulted in a €278 billion rise in both conventional lending (i.e. “related to monetary policy operations denominated in euro”) and reserves (i.e. balances held in current accounts and the ECB’s deposit facility). The lending increase reflected take-up of €420 billion under the LTRO offset by a €142 billion repayment of main (i.e. weekly) refinancing operations.

Banks are able to roll their existing LTRO borrowing into this week’s operation but are likely to demand additional funds because of the longer maturity and looser collateral requirements.

Changes in conventional lending usually have an equivalent impact on reserves since the ECB does not sterilise its refinancing operations. There may, however, be some slippage this week, to the extent that banks borrowing under “emergency liquidity assistance” facilities are able to switch into the three-year LTRO because of the loosened collateral requirements. Conventional lending, in other words, may rise by more than total lending (i.e. including emergency assistance) and reserves.

The impact, nonetheless, should be sufficient to push Eurozone reserves above their June 2010 high of €529 billion versus €474 billion last week, implying a new record also for the G7 total.