ECB lends €442bn to euro zone banks (Irish Times)

04 November 2011
Irish banks were among the 1,100 financial institutions who borrowed €442 billion from the European Central Bank (ECB) yesterday in the latest bid to unblock credit markets.

The ECB loaned the cash for 12 months at 1 per cent to banks throughout the euro zone’s 16 member states in the first of three planned auctions designed to boost liquidity and get credit flowing.

The Central Bank confirmed yesterday that Irish institutions took part, but did not say which ones, or how much they raised.

Yesterday, Rossa White, economist with stockbroker Davy, said that the EU cash would help Irish banks deal with day-to-day liquidity, and allow them to keep existing credit lines open. However, he added that it would be unlikely that they will open new credit lines as a result.

In a research note, Mr White said that yesterday’s move would improve Irish banks’ liquidity “even more so when they swap troubled loans for government paper after Nama is up and running”.

The ECB loaned the money from its own reserves. It is planning two more such auctions this year, one in September and the other in December. Credit has dried up over the last two years, a result of the crisis in global financial systems, forcing most developed economies into recession.

The Frankfurt-based ECB has been attempting to deal with this by lending banks as much money as they want against their assets at low interest rates. It announced last month that it would extend the maximum maturity – repayment time – to 12 months.

The ECB filled all bids in its first offer of 12-month loans to banks at the current benchmark interest rate of 1 per cent.

The 1,121 banks that participated receive the funds tomorrow. The euro interbank offered rate, or Euribor, for 12-month loans fell to 1.57 per cent yesterday, a record low.

The ECB is concentrating its efforts on lubricating the banking system because it accounts for about three-quarters of company financing in the region. The central bank has cut interest rates to the lowest on record and will next month start buying €60 billion of covered bonds to help free up credit.

The central bank expects the euro zone economy to shrink about 4.6 per cent this year before returning to growth by the middle of 2010. Loans to the private sector declined for a third straight month in May as banks tightened lending standards and demand for credit wilted.

Some commentators warned that the ECB’s move would not necessarily change this situation.

“While the ECB’s liquidity support to euro zone banks sounds the right thing to do, as bank lending is by far the most important source of financing for euro-zone non-financial firms, there is no guarantee that banks will use this extra liquidity to lend to the broader economy,” said Daniele Antonucci, an economist at Capital Economics in London.