Banks will return €990.5 million in crisis loans to the European Central Bank next week, slowing the pace with which liquidity gets drained out of the financial system.

The amount banks will repay on January 22nd is less than this week’s repayments of €2.566 billion and well below the €3.5 billion that was forecast in a Reuters poll. The speed with which banks repaid the long-term loans they took from the ECB in late 2011 and early 2012 to ride out a period of strained funding conditions accelerated towards the end of last year, which was the cut-off point for an ECB snapshot of banks’ balance sheets that it will assess this year.

ECB president Mario Draghi last Thursday pointed to the possibility of some short-term deleveraging as banks prepare for the assessment, which will look at whether lenders have set aside sufficient capital to cope with the risk on their books.

Such developments should, however, be seen in a longer-term context, Mr Draghi added, saying that by the end of this year, the banking system would be stronger and more transparent. The slowdown in repayments also slows a drain in excess liquidity, easing upward pressure on bank-to-bank lending rates at a time when the euro zone recovery is slowly beginning to take hold.

Excess liquidity, or cash beyond what lenders need to cover their day-to-day operations, stood at €131 billion today. Although the connection between money market rates and excess liquidity is difficult to pin down, Mr Draghi stressed last week that the ECB would monitor developments closely and was ready to consider all available instruments.

Today, the ECB said four banks would repay €632 million from the first LTRO on January 22nd, and four banks will pay back €358.5 million from the second LTRO. (Reuters)