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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

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 the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). 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 to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He 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 was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

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