Big Shift in ECB Balance Sheet a Sign of Banking Stress?
Tens of billions of funding support for European banks appears to have shifted to the emergency lending assistance program of the European Central Bank from the long-term refinancing operations, an indication that some European banks may be in dire financial straits.
The weekly financial statement of the ECB showed a 21.3 billion euro ($26.8 billion) decline in loans made under the long-term refinancing operations, known as LTROs, and shown on line 5.2 of the statement.
This likely indicates the early repayment of low cost funds provided to banks in Europe. A bank would be forced to make early repayment if collateral for the loans became ineligible because of declines in market value and the bank were unable to offer additional or substitute collateral. Additionally, a bank deemed financially unsound would be ineligible for LTRO loans.
At the same time, the ECB’s financial statement showed that “other claims on euro-area credit institutions denominated in euro” (line 6 in the statement) rose by 34.1 billion euros to 246.6 billion euros ($39.4 billion to $309.9 billion) last week. The emergency lending assistance program, or ELA, is one of a variety assets included on this line item.
What appears to have happened is that one or more large European banks were disqualified from borrowing under the LTRO and are now receiving funds under the ELA.
The main difference between the LTRO and the ELA is that under the ELA, emergency funding is provided by the separate national central banks instead of from the ECB directly. The risk is borne by the national central bank instead of by the system as a whole. But since the banks are part of the ECB system, the loans show up as assets on the ECB balance sheet.
On May 17, the ECB confirmed it had moved some Greek banks onto the ELA program of Greece’s central bank until they are recapitalized.
This would have shown up in the previous week’s statement, however.
Spanish banks accounted for 27 percent of all ECB funding. If one of more Spanish banks were considered financially unsound or were short of eligible collateral, that could explain the growth of the ELA and the shrinking of the LTRO.
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