Relief as European Central Bank's €442bn support line for banks ends without panic

Markets reacted calmly to the withdrawal of the largest single measure of official support to the banking system in human history.

The European Central Bank's historic offer of a total of €442bn (£362bn) of loans at 1 per cent to the eurozone's stressed banks at the height of the crisis last year protected the financial system from meltdown. Now the extraordinary one-year scheme is being wound up, and investors were relived that the banks collectively have apparently only sought around €131bn of replacement funding via a new three-month facility from the ECB.

The figures suggest that institutions have been able to raise funds in the money markets and from depositors more easily than feared, and may also reflect generally shrunken balance sheets – lower lending levels meaning less funding requirements.

There is much evidence to suggest that the banks have been restricting lending to the most creditworthy of customers, while the demand for loans and other forms of credit from the private sector is much diminished, reflecting a widespread desire to pay off debt and deleverage balance sheets. New regulatory moves and the generally uncertain climate around sovereign debt have also pushed banks into bolstering their reserves of capital and liquidity.

The president of the European Central Bank, Jean-Claude Trichet, said that he was confident liquidity in the eurozone banking system is being handled smoothly.

Some 171 banks borrowed €131.9bn over three months, below expectations, against the 1,121 institutions that were beneficiaries of the previous scheme.

Analysts at Goldman Sachs said: "Balance sheets continue to shrink. The deposit gap for eurozone banks has shrunk from €952bn a year ago to €740bn currently.

"From here, the focus is likely to move on to the take-up of today's six-day ECB liquidity facility. Together, today's three-month auction and tomorrow's six-day auction should give us a complete picture of the amount of replacement financing taken out by the eurozone banks."

The developments come at a time when there are persistent rumours about the health of the Spanish banking system on particular. The Spanish government announced this week a mass merger of the nation's small savings and loans institutions, or cajas, which have become the most exposed to a renewed downturn in the Spanish real-estate market.

Attention will turn to the enlarged stress tests the European authorities have been imposing on 100 leading eurozone banks. The results are expected on 15 June, and will be an important moment in restoring confidence.