The impact of TLTROs on banks’ lending policies: the role of competition

This article assesses the impact of the targeted longer-term refinancing operations (TLTROs) of the European Central Bank (ECB) on the credit supply of the euro area banks. An empirical approach is used that permits distinction between the direct and indirect effects of the TLTROs. The direct effects are that banks participating in the TLTROs increase their credit supply thanks to the lower costs prompted by these refinancing operations. The indirect effects stem from the changes that the TLTROs produce in the competition between banks in the loan and deposit markets and which also affect banks that do not participate directly in the programme, albeit in principle with an ambiguous sign. Taking a sample of 130 banks from 13 countries and their confidential replies to the ECB Bank Lending Survey, it is found that the TLTROs played a direct part in reducing the margins on lower risk loans and easing credit standards in the large enterprises segment. As regards the indirect effects, it is observed that the TLTROs also eased credit standards at non-participating banks, primarily at banks exposed to high competitive pressure, so it appears that the TLTROs increased the supply of bank credit through the indirect channel also.