The standard critique of the ECB's long-term refinancing operations at negative rates — that they subsidised zombie banks and distorted funding markets — has always struggled with a counterfactual. New structural work on euro-area banking supplies one, and it cuts the other way. Cheap central bank lending materially lowered bank default probabilities, reduced expected deposit-insurance outlays, and pulled lending rates down. The bill was paid, but not by the fisc. It was paid by depositors, in the form of lower rates on their savings.
The core finding, drawn from a structural model of the euro-area banking sector published on Liberty Street Economics, is that the shadow value of ECB long-term lending — the welfare gain per euro of subsidised funding — was positive and non-trivial during the negative-rate era. Banks that could term out their liabilities at the ECB's window rather than roll wholesale funding faced a lower probability of default. That reduction fed through mechanically to a lower expected liability for national deposit-insurance schemes, and competitively to lower rates on new loans.
That elasticity is the paper's operational claim, and it is a large one. It implies the ECB's decision to hold TLTRO (Targeted Longer-Term Refinancing Operations) rates deeply negative through the pandemic was not merely a liquidity backstop but a solvency instrument — one whose withdrawal, mechanically applied, would have raised system-wide default risk by close to two percentage points for every point of normalisation. The 2022–23 rate cycle, on this reading, was a stress test the euro-area banking sector passed in part because the TLTRO stock was allowed to run off gradually rather than repriced abruptly.
The subsidy was real. It was just paid by depositors rather than taxpayers.
Who actually paid
The distributional story is where the paper earns its keep. In the model, banks pass part of the cheap ECB funding through to borrowers as lower lending rates, but they capture part of it by suppressing deposit rates — feasible precisely because retail depositors are sticky and rate-insensitive. Welfare rises in aggregate because the reduction in tail risk and insurance costs outweighs the transfer, but depositors sit on the losing side of the ledger. That framing matters for the current debate over remuneration of reserves and the design of any future long-term operation: the question is not whether to subsidise banks, but through which liability the subsidy flows.
The dossier is one-sided. Every named forecaster in the cluster sits on the same side of the same paper, at medium-to-high conviction, and no dissenting structural model appears. Readers should treat the 1.8-point elasticity as a single well-identified estimate rather than a consensus range. The operationalisable question — whether a one-point rise in ECB long-term funding rates raises average euro-area bank default probability by at least 1.8 points in observed country-year data — is testable as the ECB's balance sheet continues to normalise, and worth tracking against the model's prediction.
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