The set of new monetary policy measures used by the European Central Bank (ECB) include targeted longer-term refinancing operations (TLTROs). Through TLTROs, the ECB offers longer-term loans to banks at favourable costs to encourage lending to the real economy when banks would otherwise be more hesitant to give out loans.
TLTROs are refinancing operations with three main characteristics. First, they are specifically targeted at maintaining or increasing banks’ lending to firms and households in the euro area. Second, TLTROs are conditional: banks only get credit at particularly favourable conditions from the ECB if they meet a specific target for lending to households (excluding loans for house purchases) and businesses. It is precisely this mechanism that incentivises banks to meet the lending target. Lastly, the ECB’s TLTROs offer longer-term lending than its standard liquidity-providing instruments, since the loans have a maturity of three or four years, thus providing stable and dependable financing.
By encouraging bank lending to households and businesses, TLTROs ensure that the real economy benefits from the ECB’s monetary policy. This in turn helps to bring inflation back towards the medium-term target of 2%.
The ECB launched three series of TLTRO operations: TLTRO I in 2014, TLTRO II in 2016 and TLTRO III in 2019. The terms of the latter series, which will finally mature in December 2024, were adjusted by the ECB on several occasions. The first adjustments were made after the advent of the COVID-19 pandemic in order to preserve bank lending to households and firms during the pandemic crisis, and subsequently, once monetary policy normalisation had begun, in order to strengthen the pass-through of increases in policy rates to bank lending conditions.