Europe News

Banks Set to Double Crisis Loans From ECB

By Patrick Jenkins, David Oakley and Ralph Atkins

European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut 489 billion euro auction last month, providing further evidence of the sector’s liquidity squeeze.

A Euro sign sculpture stands in front of the European Central Bank's (ECB) headquarters.

Several of the euro zone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29.

“Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.”

Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.

Goldman Sachs has told clients that banks could ask for twice as much in the February auction as in December when more than 500 lenders raised 489 billion euros. “They could do another 1 trillion euros easily in February,” said one senior banker. “It could be way more than that if things get worse in the markets.”

The ECB, under new president Mario Draghi, launched its funding facility in December to avert a looming credit crunch, with 230 billion euros of bank bonds coming due for repayment in the first quarter of 2012 while bond markets remained largely closed to new issuance.

Bankers credit Draghi with helping to destigmatise the ECB’s funding operation by persuading as many institutions as possible to participate. Previously, banks had shied away from such support schemes for fear of appearing weak.

Bankers expect many more banks to take part in the February auction, encouraged by the widespread participation last time, as well as the promise of unlimited cheap money — the funds attract an interest rate of only 1 percent.

Analysts suggest banks have used some of this money to invest in higher-yielding euro zone sovereign bonds, helping to drive down borrowing costs for several hard-pressed euro zone governments, including Italy, Spain, Ireland, and Greece.

But on Monday yields were mostly higher across the eurozone peripheryamid concerns over the Greek rescue plan. Portuguese 10-year bond yieldsleapt more than 2 percentage points to 17.26 percent, as investors increasingly expect the country to default.

The ECB’s decision to broaden the pool of collateral that banks can use to obtain its funds is also expected to encourage higher bidding. Draghi has said he expects “substantial” appetite for the February allotment of three-year loans.

If demand extends anywhere near the 1 trillion euro figure, the scheme would be far bigger than the market broadly expects. A poll of traders by Reuters, published on Monday, predicted the ECB would allot a total of 325 billion euros.

Italian banks dominated demand for the December money, according to data collated by Morgan Stanley .

Bankers at Spanish, French and German institutions said they were also big takers. Even Royal Bank of Scotland tapped the scheme for 5 billion euros of liquidity, using its Dutch subsidiary as a conduit.