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Emergency ECB Lending Remains Elevated

Demand for emergency loans from the European Central Bank has stayed at unusually high levels for a second day in a row.

European Central Bank
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European Central Bank

Figures on Friday showed that borrowing through the ECB’s marginal lending facility, which charges penal interest rates and tends to be used by banks in difficulty, rose to €16 billion on Thursday.

Euro zone banks the previous day borrowed €15.8 billion through the facility, which charges a rate of 1.75 percent, three-quarters of a percentage point above ECB base rates, raising suspicions a “fat finger” trading error might be to blame.

Borrowing was €1.2 billion the previous day and the daily average this year has been just €100 million a day.

Thursday’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.

The latest figures showing a second successive day of elevated borrowing could still be due to a trading error were the original borrowing rolled over.

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.

That would allow it to take a further step next month towards unwinding the extraordinary measures in place to help banks since the collapse of Lehman.

A bank could alternatively have miscalculated the amount of cash it would normally borrow at ECB open market operations.

The euro zone banking system has been returning to normal since the peak of the debt crisis last year, with banks able to borrow in the private interbank lending markets.

Many no longer need to rely on ECB funding.

Overnight market lending rates, which plunged because of the huge emergency liquidity pumped into the financial system by the ECB, have now risen back to trade close to the central bank’s refinancing rate of 1 percent.

The ECB declined to comment, in line with its policy of not giving any details about the lending facility.

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