The European Central Bank is set to test the resilience of the continent’s banking sector by requiring lenders to repay around 500 billion euros of cheap post-pandemic loans in one go.

Indeed, the approximately 4 trillion euros of excess liquidity circulating in the financial system should limit the overall impact of the giant repayment.

However, some medium-sized institutions would be under pressure. Small Italian lenders are the primary concern, with Greek banks not far away.

Italy’s outstanding borrowings under the ECB’s TLTRO program exceed the liquidity surplus that its lenders have deposited with the ECB, meaning that some of its banks will need to raise funds elsewhere to repay the loans. The excess reserves of Greek lenders are more or less equal to what they owe to the ECB. However, specific institutions in Germany, France, or other eurozone countries could also need help with repayment.

The central bank is allowing TLTRO loans to expire to reduce its balance sheet. But ECB officials are concerned about the repercussions of rising borrowing costs on lenders with the most limited access to money markets.

Italian banks may need to raise around 35 billion euros in 2023 and another 75 billion euros to prepare for further TLTRO loan repayments next year. Some institutions, most likely smaller banks, will face liquidity shortages even in the short term.