What does TLTRO mean for P2P? Confused about the meaning of TLTRO? Don’t worry – so were markets. European stock markets and the euro endured wild swings on Thursday as investors sought to understand the latest changes to ECB policy and Mario Draghi’s associated commentary. After initially cheering an expansion of QE, and a further cut to the deposit rate, markets were then disappointed by comments in the press conference which were interpreted as meaning that, because Draghi did not anticipate cutting rates any further, the ECB has run out of ammunition.
But by Friday markets had reached a more positive view. The euro was modestly weaker and stockmarkets soared with banks leading the charge. It seems that overnight the market reflected on the section of the press release that it had ignored previously– the part entitled Targeted Longer-term Refinancing Operations - or TLTRO II.
Perhaps the reluctance to look into this section was understandable - the abbreviation alone is off putting. Equally as a second iteration it is vulnerable to the tempting, but over-simplistic, conclusion that it will fail just like the last version. But due to a subtle but critically important difference from previous versions this view could prove wrong. As Gavyn Davies explores in this FT blogpost, a case can be made that TLTRO II could form the central part of what could prove to be a very effective set of policy measures. But what is most interesting to readers of AltFi is the implication for the nascent European P2P marketplace. The incremental improvements in TLTRO II versus the facilities that have preceded it are best represented by one single element – the cost to the banks of using the facility. The cost of the facility has gone from:
-40bips? Excuse me? Isolating this element makes it increasingly hard to understand how markets didn’t identify the potential impact of this facility on the day of the announcement. Yes – the use of prior iterations of the facility was previously a cost to banks. But now they can be paid 40bips to use it. i.e. their cost of capital isn’t a cost. They get PAID by the ECB to extend loans that are deemed eligible collateral. And this includes allowing banks to roll over existing LTRO-financed loans at the new rate - i.e. financing which used to cost will now attract a credit. Effectively banks are being incentivized to lend by providing them with a subsidy to do so. This will improve banking margins and should as result encourage them to lend – in so doing increasing competition for good borrowers.
So is this a concern for P2P? Whilst details remain to be confirmed it appears that TLTRO II could mean that banks compete more aggressively. By removing the fixed costs associated with a branch network ,and using new data sources to allow intelligent pricing of risk ,P2P as a model has sustainable advantages over traditional banking – at least until banks tear up their legacy technology and find a way to compete. But P2P has also benefitted from launching into an environment where the increasingly onerous capital requirements associated with new regulation have discouraged banks from seeking out new lending opportunities. TLTRO II, and the subsidy that it seems likely to bring to banks’ cost of capital, may mean that the competitive environment is about to get tougher. For continental European market place lenders the market place may no longer be as wide open as it once was.