Banks to grab share of ECB’s €500bn loans

Central bankers poised to release more money to help relieve the stress on European institutions
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The European Central Bank is set to flood banking markets with €500bn (£424bn) of cheap loans this week, taking its financial support of the European Union to €1trn in just three months.

On Wednesday, the ECB will hold its second allotment of three-year loans to private banks and other institutions, known as the longer-term refinancing operations (LTRO). Analysts are expecting banks to apply for between €200bn and €750bn in total, with most forecasts around the €500bn mark.

In December, 523 banks borrowed €489bn from the first LTRO. The loans carried an interest rate of around 1 per cent a year. The new loans will be just as cheap, but the collateral requirements have been loosened. Banks will be able to pledge corporate and consumer loans, rather than just government bonds, in return for the borrowing.

The new LTRO will be conducted through national central banks, not the ECB, so governments will take the losses should their banks be unable to repay the loans.

The first unprecedented provision of liquidity has been credited by the ECB president, Mario Draghi, with helping Europe to avoid a banking crisis this year. Some banks had found it increasingly difficult to borrow in the second half of last year. These institutions used the ECB's cheap funds to meet their liabilities.

The liquidity injection also seems to have helped bring down the borrowing costs of some distressed eurozone states, as banks, particularly in Spain and Italy, have used the money to invest in bonds issued by their governments. Italian 10-year yields have come down from above 7 per cent to 5.5 per cent. Spanish 10-year yields have fallen from 5.7 to 5 per cent.

Sony Kapoor of the Re-Define think tank said: "The bigger the LTRO next week, the more the short-term relief for the banking sector, but at the cost of making a sustainable exit from life-support even harder."

Jens Larsen of RBC Capital Markets, argued that the LTRO would be beneficial as long as banks restructure. "If the euro banks spend the time wisely by reducing their balance sheets and raising the necessary capital that's not so bad," he said. "But if they're not doing that, it's dangerous."