AMID the volley of tricks Mario Draghi, the president of the European Central Bank (ECB), deployed earlier this month to revive the sluggish euro-zone economy, “targeted longer-term refinancing operations”, or TLTROs, received little attention. For one thing, the ECB has been trying TLTROs (extending cheap credit to banks that boost lending to businesses) since 2014. Moreover, next to ever-more-negative interest rates and ever-bigger bond purchases, TLTROs seemed mundane. But if you look at the fine print, the ECB is offering to pay banks to lend.

To encourage credit growth, the ECB has been charging banks for parking excess reserves with it (those negative interest rates). The new TLTRO II scheme is supposed to increase the incentive to lend, by returning some of the money the ECB is making in this way to banks that increase their stock of corporate loans. Those that raise their lending above a certain target will be paid as much as 0.4% to borrow from the ECB, with the precise rate depending on how liberally they splash the ECB’s money around.

The forebear of the current scheme, TLTRO I, was not quite as generous. It…Continue reading

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