FXStreet (Łódź) - The Goldman Sachs team of analysts are skeptical about the effectiveness of the ECB's TLTRO program, introduced in June and aimed at reactivating the bank lending channel of monetary policy transmission in the Euro area.

Key quotes

"While the ambition of the measure is well-placed, we are skeptical that T-LTROs will, of themselves, prompt the non-linear, step change in policy stimulus to stressed economies that a reopening of a previously moribund bank lending channel might imply."

"The subsidy to bank lending provided by the T-LTROs does not discriminate between loans to small and large companies. Since costs other than funding costs – credit risks, regulatory capital requirements, collateral – are higher for loans to small firms, we anticipate that the funding subsidy from T-LTROs will largely lead to a re-intermediation of loans to rated companies that had previously substituted into debt issuance when bank credit supply was constrained."

"Precisely because it supports lending to companies that can substitute between bank and market sources of external financing, the T-LTRO is unlikely to reactivate the bank lending channel, which (by definition) operates via bank dependent borrowers."

"That said, the new T-LTROs (and wider package of new policy measures) will support credit and activity: financing costs for large corporates will fall; bank profitability will improve; and small businesses will benefit from the ‘trickle down’ effects of easier liquidity conditions."

"Reactivating the bank lending channel entails targeting support more closely on loans to bank-dependent borrowers. Lowering collateral and capital costs for loans to small firms would help achieve such targeting. The ECB may need to consider such measures towards year-end."

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