This new window offers banks three-year money at the repo rate to encourage them to use that money to lend to sovereigns, taking advantage of the arbitrage opportunity. But this financial engineering is a fragile and potentially problematic arrangement. Banks will need to post additional collateral with ECB if the bonds they offered fall in value or suffer a credit downgrade.
For precisely the same reasons – fall in value and credit downgrade – banks will need to provide additional capital against monies they have lent to sovereigns. This could put banks on a collateral spiral and erode overall financial stability.