European Central Bank working paper links relaxed TLTRO III pandemic terms to banks increasing mortgage lending shares in residential real estate vulnerable countries

The European Central Bank published a working paper analysing how the COVID-19-era easing of targeted longer-term refinancing operations III (TLTRO III) affected euro area banks’ loan portfolio composition. The paper finds that, after the relaxation of conditions, banks participating in TLTRO III increased the share of mortgage lending relative to other banks, suggesting the targeted funding tool may have indirectly contributed to residential real estate vulnerabilities in some countries. Using supervisory and market-operations data for 246 banks across 19 euro area countries from Q1 2019 to Q2 2021, the authors apply a difference-in-differences framework and instrument TLTRO III participation with banks’ borrowing allowances. They estimate that participating banks raised the mortgage share of their non-financial private-sector loan books by about 5.5 percentage points more than non-participants after the June 2020 recalibration, with the effect concentrated in countries assessed as having pre-pandemic residential real estate vulnerabilities where the estimated increase is about 7.3 percentage points. The analysis also reports mixed bank-level patterns, with stronger rebalancing among mortgage-specialised, smaller and less profitable banks, alongside evidence that more liquid and more capitalised banks also contributed, while banks closer to distribution constraints and with tighter leverage headroom rebalanced less.