In a closely watched display of its firepower, the European Central Bank (ECB) on Wednesday issued to euro zone banks another massive round of the cheap, three-year loans that have helped avert a banking crisis but have not yet revived lending to business and households.
Banks borrowed euro 529.5 billion, or $713 billion, compared to euro 489 billion in December. The ECB said that 800 banks took out loans, compared to 523 in December, as many smaller lenders took advantage of the central bank’s broader collateral rules. The ECB wanted to encourage borrowing by community banks that are likely to lend the money in turn to businesses and consumers.
Between the loan offers in December and Wednesday, the ECB has now lent banks a total of about euro 1 trillion. However, the actual amount of new money flowing to banks is closer to euro 520 billion, because many banks shifted money from shorter-term ECB loans into the three-year loans.
The loans appeared to have headed off a funding crunch that could have caused some banks to fail and many others to run short of money to lend into the euro zone economy. The ECB loans also have helped lower borrowing costs for countries like Spain and Italy, as many banks borrowed from the ECB at one per cent interest and bought government bonds paying more than five per cent.
But while the wall of money has bought time for banks and governments to deal with their formidable problems, the ECB does not appear to have yet achieved its goal of reviving lending to businesses and consumers. Data released by the central bank earlier this week showed that lending growth to business remains weak.
In addition, the ECB loans have not restored the crucial interbank market, in which banks lend excess cash to each other for short periods, ensuring that capital is never idle.
Banks — not necessarily the same ones borrowing on Wednesday — have been depositing record amounts with the ECB, a sign that they are still afraid to lend it to peers on the interbank market. As of Tuesday, banks had deposited euro 481 billion at the ECB, which pays only 0.25 per cent interest on the money but is considered the ultimate safe haven.
The ECB does not disclose which banks take out loans or where the banks are based, but it is likely there was again strong demand from countries like Italy and Spain. Government debt problems have spread to banks in those countries and made it difficult for them to raise money from private investors.
For example, Intesa Sanpaolo in Italy borrowed euro 24 billion from the ECB, double the amount it drew in December, said Enrico Cucchiani, the bank’s chief executive, according to Reuters.
Smaller banks, including many from countries like Germany that have been less affected by the debt crisis, accounted for most of the increase in the total number of banks taking advantage of ECB largesse. That was what the central bank wanted, because community lenders are a crucial source of credit for smaller businesses and consumers.
Banks from the United States and other countries outside the euro zone or European Union can also borrow from the ECB if they have subsidiaries in Europe.
The total amount borrowed was a little above expectations. Most analysts expected demand to be about the same as in December, but estimates ranged from as low as euro 300 billion and to as high as euro 1 trillion.
“In our view it is a Goldilocks outcome: not overly large as to generate concern about the fragility of the European banking system, but high enough to pre-fund a substantial share of maturing bank debt and spark more buying of Italian and Spanish paper,” Martin van Vliet, an economist at ING Bank, said in a note to clients.
Banks could borrow as much as they wanted at the benchmark interest rate of one per cent, but had to pledge collateral — typically bonds or other securities that can be bought and sold. Previously, the ECB lent to banks for a maximum of about a year.
For Wednesday’s operation, the ECB expanded its collateral standards to make it easier for smaller banks to access cash. Banks could pledge mortgages or other outstanding loan obligations, expanding the potential pool of collateral by about euro 200 billion, according to ECB estimates.
In November, tensions in the euro zone banking system were acute and the risk of a catastrophe high. Institutions needed to roll over about half a trillion euros in bonds that were maturing. But the market for debt issued by banks, where lenders would normally expect to raise fresh cash, was all but dead.
The longer-term loans from the ECB provided reassurance that banks would have enough money to keep operating even if they were shut off from capital markets. The increase in confidence also helped reopen the market for corporate bonds issued by banks — at least the stronger ones.
But some economists have expressed concern that the easy money from the ECB could take pressure off ailing banks to deal with their problems. That could breed “zombie banks” which would act as a long-term drag on the euro zone economy.
Some economists also worried that the ECB cash would encourage too much risk-taking by banks.
The ECB has been noncommittal about whether it will offer subsequent rounds of three-year loans. It is likely to gauge market reaction before deciding what additional policy moves to make, if any.
The large number of banks borrowing from the ECB may also indicate that the central bank’s president, Mario Draghi, and other top central bankers were able to convince institutions that there was no stigma attached to the loans.
Even though the names of borrowers are confidential, some banks may fear that ratings agencies — which have access to banks’ internal books — will interpret borrowing from the ECB as a sign of weakness.
© 2012 The New York Times News Service
