The Effect of TLTRO III on Spanish Credit Institutions' Balance Sheets

With the onset of the COVID-19 crisis, the ECB’s Governing Council modified the conditions of the TLTRO III, aiming to facilitate the flow of bank credit to the real economy. The new conditions encouraged an unprecedented level of take-up of the Eurosystem’s refinancing operations by credit institutions. In the case of Spain, all participating banks met the eligible net lending target (that is, loans to non-financial corporations and households, except loans to households for house purchases) established for the period March 2020 to March 2021. To ascertain the impact on banks’ balance sheets of this huge liquidity injection via TLTRO III, this article identifies four strategies – lending, holding reserves at the Banco de España, purchase of government debt and substitution for market funding – that banks could implement after applying for TLTRO III funding. The conclusion drawn is that there is a significant relationship between participation in TLTRO III and eligible lending and reserve holding strategies