LTRO, interbank stress and banks’ stock prices: a conundrum?

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LTRO, interbank stress and banks’ stock prices: a conundrum?

Stress in the interbank market increased steeply after July 2011. The figure below shows the pattern of the Euribor-Eonia Swap spread, an indicator of

Publishing date: 28 March 2012
Authors: Guntram B. Wolff

Stress in the interbank market increased steeply after July 2011. The figure below shows the pattern of the Euribor-Eonia Swap spread, an indicator of the interbank market stress, from 2007 up to now. A first peak was recorded at the end of September 2011 and then the stress peaked in December 2011. Since the end of December, the spread receded considerably and this can be linked to the long-term refinancing operations (LTRO) of the ECB which has provided abundant liquidity to banks to ensure their financing.

Source : Bruegel calculations with data from Datastream.

The ECB has clearly stepped into a non-functioning interbank market but has it bailed-out banks? One way of assessing a bail-out of a bank is to look at the stock market value of the bank. A bail-out typically means that the stock price of the bank increases. In principle, the low-cost 3-year loans offered by the ECB should be seen by market operators as helpful for the soundness of the banking system and thereby help banks stock. However, the LTROs could have a negative impact on the banks’ performance if the banks’ participation in the LTRO would signal their shortage of liquidity to financial markets.

We look at the normalized average bank stock market index consisting of the banks located in a given country since January 2011. Our sample consists of those banks stress-tested in the recent stress test of the EBA and we describe the details of our methodology in Angeloni and Wolff (2012). Banks’ market value developed differently in the five countries, with stock values of Greek banks declined by the greatest amount. However, we cannot see a clear pattern of the effects of the ECB’s LTRO. Stocks continue to move sideways since October and seem unaffected by the ECB’s operations.

Source: Bruegel calculations with data from Datastream.

Note: Daily data, normalised.

This result suggests that the ECB helped ensure the funding of banks but did not bail-out banks. As would be expected with refinancing operations, the ECB will only step into a loss after the value of the collateral and the value of equity is exhausted. Seen from this angle, the ECB helped the financial system’s stability but not the shareholders of banks. More research on assessing the detailed impact of the LTRO would be great to have.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.