Banks' dependence on ECB shrinks
Published 01/07/2010 | 05:00
The European banking sector remains heavily dependent on the ECB for short-term funding, but the dependence isn't as acute as many analysts originally feared.
That was the key outcome of yesterday's offer of three-month money to banks all over Europe from the ECB.
Weaker-than-expected demand lifted bank shares and the euro, and existing investors in bank stocks will be hoping that forthcoming stress tests of major European lenders will boost confidence even further.
Unfortunately, this temporary change in sentiment towards European banks is not country-specific, and it was difficult to tell how much of yesterday's €132bn of funds was drawn down by Irish banks.
These banks remain heavily dependent on funding from the Frankfurt-based ECB, and their reliance was "out of proportion'' according to outside observers, who pointed out how small the Irish banks were in a European context.
The downside of the announcement is that ECB funding is increasingly being replaced by lending between banks (known as interbank), but at very high rates.
The ECB is trying to wean banks off ECB liquidity programmes, but ultimately the entire system should be weaned off its dependence on wholesale funding, be it ECB or interbank.
The problems of Northern Rock and Lehman Brothers were caused -- in part -- by a dependence on wholesale funding and too much leverage.
Long-term, all regulators are hoping to tackle this problem, but now is not the time, it seems.
The best way to tackle this, of course, is to bolster the ultimate form of bank funding -- deposits -- but there is simply too much competition between European banks for this to happen.
This leaves a heavy reliance on wholesale funding, one of the causes of the credit crunch.
Yesterday, the rate banks charge each other for three-month loans in euro rose almost two basis points to 0.706pc, the highest since September 2009.
This is a signal lenders are increasingly looking to each other for wholesale funding, but paying historically high rates for the use of the money.