ECB still the major source of funding for banks
On Tuesday, banks took nearly 173 billion euros from the ECB at its weekly tender, the highest since June 2012 and well above a Reuters poll consensus of 130 billion euros.
The spike in actual allotment versus expectations is the highest in over a year. The amount maturing from last week was just shy of 122 billion.
Banks also took a hefty 13 billion euros at the ECB’s 3-month tender, more than twice the 5.6 billion euros expected by traders.
This suggests that almost six years on from the collapse of Lehman Brothers and the worst financial crisis in many generations, banks are still reluctant to lend to each other and still rely on the central bank for their day-to-day cash.
The extra cash banks hold over and above their day-to-day needs, or excess liquidity, has fallen to levels last seen before the ECB’s twin three-year long term refinancing operations (LTROs) pumped over one trillion euros into money markets.
That fall in excess liquidity is attributed to repayments of those crisis loans. Since January 2013 banks have returned more than half of that cash early.
ECB President Mario Draghi has said the early repayments were a sign banks are in a better position to raise funds through the money market.
But traders in the latest Reuters poll said if excess liquidity falls further there will be more take up at the ECB’s refinancing operations rather than a rise in interbank lending rates, suggesting money markets are still not fully functional.
A trader at a large dealer said:
Banks will surely borrow more money – (there is) no sense of confidence in the system yet and it’s difficult to say when they (banks) will start to lend to each other.
Lena Komileva, chief economist at G+ economics, said:
The volatility in the weekly MRO volumes – and the parallel volatility in Eonia rates in recent days – suggests that interbank markets are still not functioning normally and ECB liquidity remains key for banks. This is a market that is still failing in its basic function to intermediate funds, with lenders hoarding cash and borrowers reliant on the ECB’s liquidity backstop.