Business World

Sunday 17 December 2017

ECB lends banks €29.4bn to smooth loans

The European Central Bank said it will lend banks €29.4bn for six days to help ease the expiry of €225bn in longer-term loans.

Banks today need to repay €75bn in 12-month funds, €18bn in six-month funds and €132bn in three-month loans.

The 12- and six-month loans won’t be renewed as the ECB phases out the non-standard measures used to fight the financial crisis.

In a three-month loan offered by the ECB yesterday, banks asked for €104bn, which was less than some analysts forecast. The loans are offered at the ECB’s benchmark rate of 1pc.

“Today’s loans combined with yesterday’s cash is a lot less than the market would have expected,” said Nick Matthews, an economist at Royal Bank of Scotland Group in London.

“It signals that overall in the euro area the reliance on ECB cash might be waning but we suspect that the banks in the periphery countries will remain on the ECB drip.”

Matthews said about 60pc of ECB loans were taken up by Irish, Portuguese, Spanish and Greek banks in August.

At the same time, the lower take-up of the ECB cash yesterday and today means that less excess liquidity will remain in the system, putting pressure on money market rates, said Christoph Rieger, head of fixed income strategy at Commerzbank in Frankfurt.

German two-year notes and Euribor futures dropped after the announcement.

Overly reliant

The ECB said yesterday it is concerned that some banks remain overly reliant on central bank cash.

Governing Council member Ewald Nowotny said on September 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.”

The Frankfurt-based ECB said 50 banks asked for the six-day funds at 1pc. Banks can currently borrow one-week money from each other in the market at about 0.52pc.

While the ECB is still lending banks as much cash as they need against eligible collateral, the duration of the loans is shortening.

The ECB started to phase out its longer-term loans last year before Greece’s debt crisis, which sparked a bond-market rout and threatened to undermine the foundations of the single currency, forced a rethink.

In May, the ECB reintroduced full allotment in its three-month tenders and agreed to make an additional six-month loan.

Earlier this month, the ECB decided to provide banks with unlimited liquidity in operations of up to three months until the end of the year as the euro-region recovery shows signs of weakening.


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