UK banks snap up billions in cheap ECB loans

European Central Bank's second burst of lending brings lifeline for struggling financial institutions up to €1 trillion

British banks joined the queue for hundreds of billions in cheap three-year loans from the European Central Bank yesterday as its funding lifeline for the region's financial institutions surged past the €1 trillion (£847bn) mark.

Click HERE to view graphic

The ECB's second burst of three-year loans under its so-called long-term repo operation (LTRO) drew bids from 800 banks for a total of €529.5bn. The higher-than-expected amount takes the total to €1.02 trillion after the ECB lent €489bn to 523 banks under its first LTRO last December.

Lloyds Banking Group drew down €13.5bn in ECB loans, putting it among the biggest users, while HSBC borrowed another €350m following the €5.2bn it took in December. Barclays and Royal Bank of Scotland refused to comment on their participation.

Mario Draghi, the president of the ECB, sanctioned the move to flood the financial markets with cheap cash last year to avert a credit crunch and bank runs in weaker eurozone states as the sovereign debt crisis intensified. The initiative has helped to trigger a rally in stock markets, while Spain and Italy have seen their borrowing costs fall as banks pump the three-year loans – charged at knockdown rate of 1 per cent – into previously spurned sovereign debt offering higher returns.

Yesterday's auction further eased the market pressure on Italy, which saw benchmark 10-year bond yields fall to 5.18 per cent, their lowest since last summer, after spiking at a unsustainable 7.52 per cent last November. Spain's borrowing costs also slipped below 5 per cent yesterday.

In evidence to the Treasury Select Committee, Sir Mervyn King, the Governor of the Bank of England, said the loans had staved off a banking collapse in the eurozone's southern states. He said: "The prospect of a bank run in the eurozone area has been removed by the action of the ECB."

Martin van Vliet, an analyst at ING Bank, said: "The higher number of participating banks might also reflect fresh demand from banks that did not participate in December because of reputational considerations, but concluded that it was an offer they couldn't refuse after all. In any case, we expect Italian and Spanish banks to have remained the heaviest users of the facility, as in December they took up almost half of the total."

Bank shares rallied across Europe as analysts said the auction had delivered a "Goldilocks" result, with the handouts not large enough to spark fears over Europe's banks, but high enough to help banks to pay off a big chunk of bank debts falling due this year.

But Nick Matthews, an economist at Royal Bank of Scotland, warned of the dangers of banks' dependence on funds from the ECB, which is likely to expand the size of its balance sheet to €3 trillion through the move. He said the move helped banks stave off risks in the near term, but "LTROs do not address the underlying solvency issues and ultimately funding stresses can quickly return. Given that there are no further tenders scheduled and the recent ECB rhetoric has been skewed towards this being the last, we believe the market will return to fundamentals and move away from this liquidity euphoria."

Paul Tucker, a deputy governor of the Bank of England, warned that UK banks were feeling the effects of the financial chaos in the eurozone despite the ECB's action. He told MPs: "The tangible possibility of calamity in the euro area increases bank funding costs, even though UK banks have gone some way to strengthening their balance sheets."

€13.5bn

Amount borrowed fromthe European Central Bank by Lloyds yesterday.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?