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Regarding direct effects, the TLTROs reduce the marginal costs of the participating bank, which expands its credit supply. There are two indirect effects. First, the TLTROs increase the competition in the credit market by levelling the playing field. Second, as the bidder replaces part of deposit funding with TLTRO funding, the competition in the deposit market weakens, which reduces deposit rates and the marginal costs of the non-bidder. The main predictions of the model are a positive direct impact of the TLTRO on the bidder’s credit supply and an ambiguous indirect impact on the non-bidder’s loan supply.
Authors then test those predictions with the confidential answers to the ECB’s Bank Lending Survey (BLS) by 130 banks from 13 euro area countries, matched with individual bank balance-sheet information and operations data. They measure bank lending policies with credit standards and loan margins, as reported by banks in the BLS. Regarding direct effects, their empirical analysis indicates that the transmission of monetary policy takes place mainly through the adjustment of margins on loans to relatively safe borrowers. In addition, their results suggest strong indirect effects of the TLTROs on credit standards, but no significant impact on margins on average loans. These effects are concentrated in banks with low market share that face high competitive pressures, suggesting that competition in the credit market plays a crucial role.
Finally, it is worth mentioning that authors find significant effects of the TLTROs on a category of loans, housing loans, which was not targeted by the measure. This suggests important spillovers of the TLTROs, as banks search for yield in a profitable segment of the credit market. However, there is also some evidence that the TLTROs did not lead to excessive risk taking, as TLTRO uptakes are negatively correlated with the probability of narrowing margins on riskier loans.