Banks urged to take up ECB's emergency 3-year loans

Wed, Dec 21, 2011, 00:00

THE EUROPEAN Central Bank is expected to report strong demand for an offer of unlimited three-year loans after banks were urged to take the funds as part of concerted efforts to ease severe strains across the euro zone’s financial system.

Lenders across the region have been locked out of public funding markets in recent months due to fears of a worsening of Europe’s sovereign-debt crisis. However, some banks have historically been keen to avoid turning to the ECB for fear of signalling weakness to their peers.

ECB president Mario Draghi said last week: “We see no stigma attached to the use of central banking credit provisions: our facilities are there to be used.” The ECB announced the emergency three-year loans, known as longer-term refinancing operations, or LTROs, earlier this month, in an attempt to help banks overcome €720 billion worth of funding due to mature next year.

The previous largest amount allocated in a single ECB operation was the €442 billion in one-year loans offered back in June 2009. Some analysts think demand for three-year liquidity could exceed that figure given current financing strains – although the median forecast is lower.

“Our banks team believes that banks are being actively encouraged by policymakers to use the LTRO in size to reduce stigma for banks which use it; and to underpin ,” Morgan Stanley analyst Huw van Steenis wrote. “We expect many will use the three-year LTRO in case funding markets were to remain closed for 2012.”

One market participant said: “Large banks have been given a call by national central banks, encouraging them to use the LTRO to cover next year’s funding needs . . . They’re trying to reduce the stigma. It all feels very well orchestrated.”

The take-up of the LTRO, which is offered against collateral, will be announced today. Analysts say the result is hard to forecast as it involves gauging funding and liquidity pressures within the euro zone and predicting banks’ behaviour. Markets have been debating how Europe’s banks will use the loans. The ECB has suggested the facility is aimed at covering banks’ hefty financing needs next year.

A large take-up, the central bank hopes, would avoid banks having to shrink their balance sheets.

– Copyright The Financial Times Limited 2011