Refinancing operations: an evolving monetary policy instrument

To participate in Eurosystem refinancing operations (as eligible monetary policy counterparties), banks have to sign an agreement and pledge collateral with their national central bank.

Under the standard framework, prior to 2008, operations were carried out on a limited basis via auction, and were used to steer overnight interest rates in the interbank market. Since 2008, refinancing operations have been carried out at a fixed rate with full allotment.      

Main refinancing operations (MROs)

These are carried out every Tuesday and have a maturity of one week. They are the Eurosystem’s main tool for providing liquidity and steering interest rates in the unsecured overnight interbank market.

Under the standard framework in place before 2008, MROs were carried out via an auction system and were mainly at variable rates. Banks submitted bids to their national central bank, indicating the amount of liquidity they needed and the proposed interest rate (which had to be higher than the minimum rate set by the ECB). Bids were then met in descending order, starting with the highest rate bid and ending with the lowest, until the full amount of the operation had been allotted.

Since 2008 and the introduction of non-standard measures, the Eurosystem has conducted its operations on a fixed rate full allotment (FRFA) basis. This means banks can borrow as much as they want at the rate set by the ECB, provided they post sufficient assets as collateral.

Longer-term refinancing operations (LTROs)

The standard framework also includes longer-term refinancing operations or LTROs, which usually have a maturity of three months. Since 2007 and the financial crisis, they have been carried out more frequently and with maturities of up to three years (very long-term financing operations or VLTROs, which were conducted from December 2011 to February 2012).

To keep money markets operating smoothly during the pandemic, the Eurosystem also introduced pandemic emergency longer-term refinancing operations or PELTROs.

Targeted longer-term refinancing operations (TLTROs)

Since September 2014, the Eurosystem has carried out three series of targeted longer-term refinancing operations, each calibrated slightly differently, but all designed to stimulate bank lending to the real economy (loans to households, excluding loans for house purchases, and loans to non-financial corporations).

The last series, TLTRO III, was announced on 7 March 2019 and was designed to maintain an accommodative monetary policy and keep euro area lending conditions favourable. TLTRO III followed on from two previous series of operations with a four-year maturity: TLTRO I which was launched in September 2014, and TLTRO II which was launched in June 2016.

TLTRO III consists of ten refinancing operations with a maturity of three years, carried out once a quarter between September 2019 and December 2021, and with an early repayment option after one year. The interest rates on these loans depend on the borrower’s lending performance (its provision of loans to the real economy), measured over three separate reference periods. Unlike in standard refinancing operations, there is also a limit on the amount banks can borrow. This limit or borrowing allowance is calculated as a proportion of their outstanding lending to households (excluding loans for house purchases) and non-financial corporations as at 28 February 2019.

After making several changes to the terms of this third programme, the Eurosystem modified the interest rate calculation mechanism as of 23 November 2022 to reflect the tightening of financial conditions.    

Fine-tuning operations

These are operations with variable maturities that can be executed on an ad hoc basis to remove or provide extra liquidity, depending on the Eurosystem’s steering needs. They can be used to cushion bank liquidity shocks and steer overnight interest rates in the interbank market. Unlike in other refinancing operations, the Eurosystem can select a limited number of counterparties to participate in fine-tuning operations, and normally executes them through quick tenders.

Refinancing operations in foreign currency 

The Eurosystem’s toolkit includes refinancing operations in foreign currency. The terms and conditions of these operations (maturity, frequency, rate, tender procedure) are at the Eurosystem’s discretion.

Participation in these operations is restricted to monetary policy counterparties. They are required to sign a standard agreement and additional legal documents.