Cyprus Banks Significantly Reduce Eurosystem Borrowing Following €2.6 Billion in TLTRO Repayments

Cypriot banks have nearly eliminated their borrowing from the Eurosystem through the Targeted Longer-Term Refinancing Operations (TLTROs), as the latest data from the Central Bank of Cyprus (CBC) reveals total repayments amounting to €2.6 billion.

According to the CBC’s monthly balance sheets, the remaining TLTRO borrowing dropped dramatically to €100 million by the end of June, down from €2.7 billion at the end of May. This follows earlier repayments totaling €1.8 billion in March 2024.

In June, significant repayments were made by Hellenic Bank and the Bank of Cyprus, with the former repaying €2.3 billion and the latter €0.3 billion. These repayments effectively reduced their borrowing from central banks to zero. Additionally, Astrobank, in its financial results, reported that its funding from central banks stood at €100 million as of June 30, after repaying €100 million in March 2024.

TLTROs, which were introduced in June 2014, were designed to provide long-term liquidity to commercial banks under favorable lending conditions. The primary aim was to stimulate lending to the real economy, especially during a period of deflationary pressures. These instruments were targeted, as the amount available for banks to borrow was directly linked to the loans they extended to businesses and households.

A significant change occurred with the introduction of TLTRO III, which was launched after the outbreak of the Covid-19 pandemic. This version allowed banks to borrow from the Eurosystem at a negative interest rate of 1 percent, effectively giving them a 0.5 percentage point advantage as they deposited their liquidity with the Eurosystem at a negative interest rate of 0.5 percent. These favorable interest rates were in place until June 2022. However, from November 2022, the cost of borrowing was adjusted to align with the average cost of accepting deposits. This change indirectly encouraged banks to proceed with early repayments.

In response to the war in Ukraine and the subsequent surge in inflation, the European Central Bank (ECB) adopted a highly restrictive monetary policy to curb rising prices. This policy included steps to reduce its balance sheet, thereby tightening liquidity in the market.

It is important to note that Cypriot banks' balance sheets are characterized by exceptionally high excess liquidity. During the peak of the Covid-19 pandemic, these banks took advantage of the TLTRO tool due to the favorable financing terms it offered. According to its latest financial results, the Bank of Cyprus reported liquidity of €7.3 billion at the end of June, following the repayment of TLTROs. Similarly, Hellenic Bank, in its first-quarter results, reported liquidity of €5.1 billion, excluding any borrowing through TLTROs.

As an indication of the scale of the repayments, borrowing through TLTROs peaked at €6.5 billion in October 2021 but has since steadily decreased, with the majority of this borrowing concentrated in Cyprus’ two largest banks.

By fLEXI tEAM