ECB made bank funding cheaper only for banks that actually lend more

After the euro-area crisis, bank credit to firms and households was weak. In March 2016 the ECB announced TLTRO II: four targeted longer-term refinancing operations from June 2016 to March 2017, each with four-year maturity.

The clever part was the rate. All banks paid the main refinancing rate, but those whose lending between February 2016 and January 2018 exceeded their benchmark paid less — as low as the deposit facility rate, with the discount scaled linearly up to a 2.5% lending overshoot.

The first operation, settled on 24 June 2016, lent €399.3 billion to 514 banks at a 0% rate, much of it a rollover of earlier TLTRO borrowing; the incentive structure encouraged banks to pass the funding into new credit rather than hoard it.

Cheaper money for banks that actually lend

The interest rate itself was the incentive: lend more, pay less.

Borrowing was capped at 30% of eligible loans, limiting moral hazard.

Reporting needed only two submissions, keeping the administrative burden low.

If you want a specific behavior, price it: tie the interest rate of a lending facility to the borrower's behavior, and the subsidy goes only where the policy goal is met.

TLTRO II ran through March 2017 and was followed by TLTRO III (2019), which used the same lend-more-pay-less logic; the design became a reference for targeted central-bank credit facilities worldwide.