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European banks suck up 530bln euros ECB funding

03-01-2012 07:49 BJT

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European banks gorged on 530 billion euros at the European Central Bank's second offering of cheap three-year funding, fuelling hopes the credit will flow to businesses and that it will help ease government borrowing costs.

European banks have been enjoying a financial feast.

They’ve borrowed 530 billion euros from the European Central Bank’s second offering of cheap funds.

800 lenders took slightly more money than expected in the Long Term Refinancing Operation and significantly more than they did during the first funding offer in December.

The 3-year loans are the ECB’s latest attempt to fight the euro zone debt crisis.

It believes the first funding operation averted a major credit crunch and Bridget Gandy from Fitch Ratings expects this one to have a similar effect.

Bridget Gandy, co-head Emea Financial Institutions at Fitch Rating said: "We’re talking about an extra 500 billion which sounds like a large number, but balance sheets, total balance sheets of European banks are 33 trillion, so it’s not actually funding all of the banks. So it’s generally the confidence that the market is going to see by these banks being able to roll over their short-term funding and buy a bit more time."

It won’t be immediately clear what the banks will do with the new funds.

Analysts say some smaller lenders will use the cash to keep themselves afloat.

ECB President Mario Draghi has urged them to use the money to lend to businesses and households, to boost economic growth.

But the Governor of the Bank of England, Mervyn King, says the first operation didn’t help small businesses in the euro zone.

Mervyn King said: "What’s it’s done is to provide a source of funding to banks particularly in the southern member countries in the euro area, which were experiencing a bank run, enabling them to fund the withdrawal of funds that was occurring and was essentially a bank run in the second half of last year, and that money is flowing to banks in the northern part of Europe. So it’s eased the funding conditions."

ECB officials also hope the new money will be used to buy sovereign bonds, especially those from countries like Spain and Italy.

Spanish and Italian banks both increased by record amounts the government debt they bought last month.

Independent banking analyst Ralph Silva says it isn’t just banks who have asked for the money.

Ralph Silva said: "That’s the finance arms of car companies and grocery stores, which are asking for money, which is the first time they’re doing that, and I suspect that a lot of that money is going to end up building new plants and new facilities instead of getting out to loan."

The ECB hopes this second funding operation will be the last.

But analysts say that’s dependent on improved market confidence - and it will take a few months to gauge if investor sentiment is improving.

 

Editor:Zhang Rui |Source: CNTV.CN

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