Demand for E.C.B. Loans Surpasses Expectations

European stocks and the euro gained, while bond yields fell for euro-zone governments like Spain and Italy that had been under pressure of late.

In its role as lender of last resort to banks, the E.C.B. allocated 489.2 billion euros, or $644 billion, to 523 institutions. That was well above the roughly €300 billion expected by analysts polled by Reuters and Bloomberg News.

It was the first time that the E.C.B. has extended such loans for maturities of longer than about a year. Banks will pay the benchmark interest rate, currently 1 percent.

The E.C.B., as part of its effort to prevent a credit crunch, also broadened the collateral it will accept in return for loans. The central bank is even accepting outstanding loans as security, a measure designed to help smaller community banks that may lack conventional forms of collateral like bonds.

Mario Draghi, the E.C.B. president, said earlier this week that helping the smaller banks was crucial because they provide most of the credit to small businesses.

The three-year loans are also designed to compensate for a dearth of longer-term market funding, at a time when banks are facing the need to roll over an extraordinarily high amount of their own debt. Banks in the euro zone must raise more than 200 billion euros in the first three months of 2012, according to data compiled by Dealogic and cited by the E.C.B.

Banks often borrow money for relatively short periods and loan it for longer periods, profiting from the difference in short-term and long-term interest rates. But this so-called maturity transformation means that banks must continually roll over their debts. An otherwise healthy bank can fail if it is not able to raise fresh cash.

The cheap loans issued by the E.C.B. may also indirectly help governments like Spain and Italy that have faced higher borrowing costs. Spain paid sharply lower interest on debt it auctioned on Tuesday, as banks appeared to use cheap E.C.B. money to buy the bonds, profiting from the difference in interest rates.

The E.C.B. stepped up its lending to banks after the collapse of Lehman Brothers in 2008, allowing them to borrow as much as they want at the benchmark interest rate. But until Wednesday the E.C.B. had not offered loans for more than about a year.

Mr. Draghi has been reluctant to step up E.C.B. intervention in sovereign debt markets, saying the bank is forbidden by treaty from financing governments. But he acknowledged Monday that banks may be using money borrowed from the E.C.B. to buy government bonds, which would be a form of indirect financing.

The E.C.B. cannot tell banks how to use the money, he told the European Parliament on Monday. “We don’t know how many government bonds they are going to buy,” Mr. Draghi said.

The sovereign debt crisis has raised doubts about the creditworthiness of euro area banks and constrained interbank lending, which is crucial to functioning of the financial system.

“People don’t trust each other and if they don’t trust each other they don’t lend to each other,” Mr. Draghi said.

Article source: http://www.nytimes.com/2011/12/22/business/global/demand-for-ecb-loans-surpasses-expectations.html?partner=rss&emc=rss