DEMAND FOR emergency loans from the European Central Bank (ECB) has jumped to levels not seen since the collapse of Lehman Brothers, in a surprise move blamed by some brokers on a “fat finger” trading error.
Brokers said that one of the possible reasons for the jump in borrowing through the ECB’s marginal lending facility, which charges penal interest rates and tends to be used by banks in difficulty, could be an erroneous trade.
Euro zone banks borrowed €15.8 billion through the facility, which charges a rate of 1.75 per cent, three-quarters of a percentage point above ECB base rates, on Wednesday.
That compared with €1.2 billion the previous day and a daily average of just €100 million this year.
Brokers said there were no general signs of tensions in the system. There were no rumours of banks encountering severe funding problems either.
The benchmark overnight market rate for lending euros, known as Eonia, eased to 0.7 per cent on Wednesday from 0.75 per cent the previous day.
Yesterday’s demand for emergency ECB loans was the highest since June 2009. It matched levels that were consistently seen about the time of Lehman’s failure, when banks were struggling to finance themselves. Then, lending markets seized up because banks, worried about counter-party risk, were refusing to lend to each other.
Don Smith, economist at Icap, said: “This is an extremely unusual event and at face value should trigger alarm in the market, but there is absolutely no sense of panic, which suggests that this is probably a dealer error – maybe a miscalculation or a ‘fat finger’ on a keyboard.”
Traders can make mistakes in transactions by failing to type in a decimal point or typing in an extra zero.
In this case, a dealer could have typed in an order for €15 billion instead of €1.5 billion, brokers said. This would involve losses for the borrower involved.
Laurent Fransolet, analyst at Barclays Capital, suggested an alternative explanation: a bank that had become heavily dependent on ECB loans deliberately switched to the central bank’s marginal lending facility rather than using its regular offers of liquidity. Such a move could have been engineered by the ECB in order to “clean” the system, he said.
The ECB declined to comment, in line with its policy of not providing any details about the lending facility.
