Banks borrow record 1.31 trillion euros from ECB

KEY POINTS

• Although borrowing was more than twice as big as in any previous ECB facility, the net take is smaller as banks likely rolled over around 750 billion euros worth of earlier ECB funding to take advantage of record low rates.
• The negative interest rate means banks that tapped the auction will earn 0.50% for one year with no strings attached and 1% if they simply refrain from shrinking their loan book.

The European economy has been irreversibly altered by Russia's invasion of Ukraine, economists at some of Europe's major banks have suggested, posing unique challenges for governments and the European Central Bank.

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Euro zone banks borrowed a record 1.31 trillion euros ($1.47 trillion) from the European Central Bank on Thursday, taking advantage of negative interest rates to meet growing demand for credit from companies hit by the deepest recession in living memory.

Launched six years ago, the ECB's targeted-longer term refinancing operations (TLTROs) were redesigned earlier this year to help the economy cope with the coronavirus crisis and banks will get the cash for a rate as low as minus 1%.

At 1.31 trillion euros, take up is above expectations with most analysts predicting a figure just over 1 trillion euros for the three-year loans.

Forecasts were generally in the 900 billion to 1.4 trillion euro range.

Although borrowing was more than twice as big as in any previous ECB facility, the net take is smaller as banks likely rolled over around 750 billion euros worth of earlier ECB funding to take advantage of record low rates.

The negative interest rate means banks that tapped the auction will earn 0.50% for one year with no strings attached and 1% if they simply refrain from shrinking their loan book.

The interest rates for the remainder of the loan's duration will be as low as the ECB's deposit facility, currently minus 0.5%. The take-up increases the ECB's balance sheet and bolsters its hopes that banks will continue to lend even as the economy shrinks by almost a tenth, helping firms survive until Europe is ready to fully reopen after the crisis.

Companies drew down their credit lines at the start of the pandemic. This is in sharp contrast with the bloc's financial and debt crises a decade ago, when banks withheld credit to protect their balance sheets, exacerbating the downturn.

The ECB, which also supervises the bloc's biggest banks, has now allowed lenders to run down their buffers without penalties, also in the hope they inducing lending.