THE SURGE in emergency overnight borrowing by banks from the European Central Bank has continued, prompting market observers to speculate about what may be behind the trend.
A total of €15 billion was drawn from the ECB’s “marginal lending facility” on Tuesday night, on top of €14.8 billion lent on Monday night and the €17.3 billion borrowed last Thursday, the highest since June 2009.
The level of overnight borrowing remains exceptionally high even by the standards of the past few months. Typically banks draw just millions of euro from the overnight facility.
This has perplexed market participants as the ECB recently moved to flood the euro zone financial system with liquidity, in effect taking over from the dysfunctional interbank funding system.
Highlighting its increasingly central role, it supplied €489 billion in three-year loans at attractive rates to banks last month.
Divyang Shah, IFR markets strategist, said: “One would have expected this to come down given the excess liquidity in the system.
“The persistence of borrowing via the ECB will only increase concerns over an individual euro zone bank.”
In addition to the three-year loans and the overnight facility, which incurs a penal interest rate of 1.75 per cent, the ECB also offers weekly, monthly and three-month liquidity. It does not disclose which banks use its emergency lending facilities.
Bankers said it was unlikely that any euro zone institution was in trouble from a liquidity point of view, given the three-year loans offered last month.
Some observers believe technical reasons lie behind the heightened usage. Banks selling portfolios of loans could have encountered unexpected delays in the closure of transactions, meaning that last-minute rollover funding had been needed.
Early last year two Irish banks were revealed to be behind a €16billion jump in overnight ECB borrowing as they prepared to sell assets as part of their restructuring programmes.
However, analysts also suggested banks could be trying to manage collateral, since all of the ECB’s loans are offered against security, such as bonds or structured debt.
While the ECB is keen to finance banks in order to help them lend to the real economy, so far much of the liquidity supplied, including the three-year loans, has been parked back at the central bank. – Copyright The Financial Times Limited 2012
