So what has happened?The European Central Bank has said that 523 banks have borrowed €489 billion in three-year loans, the first time that the Frankfurt-based central bank has provided money for that length of time.
That seems like a lot – is it?
Absolutely. It was the largest amount loaned to European banks in a single ECB operation since the €442 billion allocated in June 2009 for one-year loans.
The size of the figure reflects the stress being experienced by the banks as the euro crisis continues to rage.
Have the Irish banks drawn much of the €489 billion?
The exact level of borrowings by the Irish banks is not known; the Central Bank would not comment on the level of borrowing. But the Department of Finance said it would expect them to borrow three-year money in the ECB’s auction given that the loans will give greater certainty to the banks.
The guaranteed Irish banks had borrowed €68.7 billion from the ECB at the end of October.
The level of ECB borrowings by the banks will be published by the Central Bank in the middle of the next month, while more detailed figures on the current level of longer-term borrowing will be released at the end of the month. A further €48 billion was borrowed from the Irish Central Bank in emergency loans through “exceptional liquidity assistance”.
The majority of this went to Irish Bank Resolution Corporation, formerly Anglo Irish Bank and the Irish Nationwide Building Society.
Why is the ECB doing this?
The aim is to improve liquidity in the European banking system where institutions are struggling to fund themselves amid lingering concerns over the debt crisis and the future of the euro.
The European Central Bank is trying to flood the banking markets with cheap money for a longer period so that financial institutions can continue to fund themselves when they are struggling to raise loans in the international money markets.
The objective is to make banks more resilient and better funded.
The ECB is also hopeful that this additional liquidity in the banking sector may alleviate the wider euro zone debt crisis and will encourage banks to buy Italian and Spanish debt to ease the borrowing strain on those countries.
Frankfurt has also increased the pool of collateral that it can accept for loans which will allow more banks to borrow three-year cash.
Since the banking crisis began four years ago, the ECB has increased the duration of its longer-term lending to banks from the normal three-month period to loans of six months, one year and 13 months (to allow banks cover two end-of-year reporting dates).
When did the ECB change its lending rules to enable this?
On December 8th, the ECB said that it would provide emergency three-year loans under its “longer-term refinancing operations” or LTRO to help banks raise €720 billion worth of funding that falls due to be repaid during 2012.
How much will this cost the banks?
The interest rate on the three-year loans is calculated from an average of the ECB’s main interest rate over the next three years.
Given that this rate stands at just 1 per cent, banks could be saving more than 4 percentage points on the rate they would be paying in the open market.
Why now?
December 31st is a crucial date in the banking calendar when they must square off assets and liabilities, and funding arrangements for their end-of-year accounts, so this period up to Christmas is a busy time for the treasury departments of the banks.The euro crisis also means that banks are finding it harder and harder to fund themselves at a sustainable rate so the pre-Christmas strains are more pronounced for European banks this year.
