EU regulators overseeing next year’s long-awaited stress tests of the region’s banks are preparing to penalise any lender that remains reliant on the European Central Bank’s landmark cheap funding scheme.

The move will cause further friction in the banking sector as it underlines the tension between the need to maintain liquidity to lenders and attempts to wean them off their dependence on ECB support.

The European Banking Authority, the EU's umbrella regulator, plans to measure banks' reliance on the ECB's long-term financing operation, or LTRO, according to people familiar with the watchdog's thinking.

Details of the test are still being drawn up but the plan would see the EBA mark down any bank that uses LTRO by comparing the subsidised scheme’s low financing costs with the real market funding rates the bank would otherwise have to pay.

Such treatment risks stigmatising usage of the LTRO scheme, analysts say. "[This] could reduce [LTRO's] attractiveness," Morgan Stanley analysts wrote in a recent note to clients.

The LTRO scheme was introduced in late 2011 as one of Mario Draghi’s first decisive policy initiatives as ECB president. The move was key to settling nervy market sentiment towards euro zone lenders. As a result, banks’ cost of funding in bond markets fell and lenders that had been frozen out of the market subsequently found it easier to raise money. But over the past year or so, banks have increasingly complained about being awash with liquidity, unable to find commercially viable investment opportunities for the money they have raised from the LTRO and in the markets.

Banks’ early repayment of the three-year LTRO funds has accelerated as a result, more than doubling over the past nine months. An aggregate €352.9 billion of the original €1.1 trillion has been returned to the ECB. A total of €665.7 billion remains outstanding, with Italy’s top seven banks the most exposed, sitting on an estimated aggregate €120 billion.

But as LTRO repayments gather pace to meet the first deadline late next year, money market rates are predicted to keep rising, potentially threatening the euro zone’s fragile economic recovery.

– Copyright The Financial Times Limited 2013