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LTRO a 'Crutch' for European Banks: StanChart Asia CEO

Standard Chartered Bank's Asia CEO Jaspal Bindra has warned that the European Central Bank's long-term refinancing operations could lead to unintended consequences.

A man walks past a logo of Standard Chartered bank at the headquarters of SC First Bank in Seoul on June 27, 2011.
Park Ji-Hwan | AFP | Getty Images
A man walks past a logo of Standard Chartered bank at the headquarters of SC First Bank in Seoul on June 27, 2011.

"We suspect the banks are going to get very used to this crutch and entitlement benefit of this easy and cheap funding," Bindra told CNBC on Thursday. "That could lead to other consequences, unintended, in the future."

European banks picked up 529.5 billion euros ($705 billion) in the ECB's second long-term financing operation (LTRO) on Wednesday.

StanChart , based in the U.K., is one of only a few major European banks that have not taken advantage of the fresh supply of cash from the ECB, which allows banks to stock up on cheap three-year loans at an interest rate of just 1 percent.

Bindra's comments come a day after StanChart's global Chief Executive Peter Sands criticized the massive central bank intervention in Europe.

He was quoted in the Financial Times as saying, "It is not clear what the exit strategy is. What happens in three year's time when (this money) needs to be refinanced?"

According to an analyst from Barclays Capital, strong banks like StanChart and HSBC could be at a disadvantage as the ECB provides liquidity to competitors with weaker balance sheets.

"Of course banks like StanChart and HSBC that pay a higher cost to maintain a more stable funding base (namely customer deposits) are disadvantaged in that their competitors' weaker funding position is being supported," the Barclays analyst told CNBC.

HSBC borrowed 350 million euros ($466 million) during the second LTRO, down from 3.9 billion euros ($5.2 billion) during the first round in December.

According to Jim Antos, Bank Analyst at Mizuho Securities Asia, the LTRO was a "financial bonanza" for banks like HSBC, which are in good financial condition.

"The LTRO is a tremendous financial opportunity. Borrow at 1 percent for three years, and redeploy this cheap funding into assets yielding 4-5 times the underlying cost," he said.

However, he added that these funds came with downside risks. By taking part in the LTRO, HSBC, which does not need a government bailout, could risk being "misconstrued by EU taxpayers or political officials that the bank has received government support."

In this context, StanChart is safe, says Antos, as the bank has made it clear that "they wish to avoid the potential for reputational risk by accepting the funds, even though of course this program is very attractive financially."

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