According to the rumor mill, the ECB is trying to wiggle itself out of the TLTRO arbitrage windfall for banks. Just to refresh your memory, recall that as part of the pandemic response the ECB offered banks the extremely attractive TLTRO-loans with interest rates as low as minus 1 percent for the June 2020/June 2022 period. For the remaining lifetime of the loan, the interest rate is the average deposit rate over the lifetime of the loan.[1] Nearly all banks have met the ECB’s TLTRO conditions and thus received 1 percent interest on their TLTRO borrowings for up to 24 months. Because of the expectations of ECB rate hikes, the TLTROs will remain a boon for banks until they mature because of an arbitrage opportunity. This windfall for banks has become quite problematic for the ECB, given the sizeable amount of TLTRO loans outstanding: 2.2 trillion euros.

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Note: there is an error in the original PDF which will soon be corrected. The interest rate on required reserves is currently zero. But in the era of positive central bank rates the rate on require reserve was the average main refinancing rate during the reserve maintenance period. So, when the ECB finally raises the refinancing rate, banks will be remunerated on required reserves if the ECB sticks to tradition. From the perspective of most banks, it will be pretty lucrative (for most banks at least) to face higher reserve requirements that are remunerated at a rate that is higher than the deposit rate. So, if the ECB would tinker with reserve requirements to offset the TLTRO windfall, the remuneration of reserves would have to remain zero. Or at least for a large chunk of required reserves.