December 15, 2019

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.

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Economix Blog: Fed Lashes Out at ‘Errors’ in Reporting

6:27 p.m. | Updated with elaboration on Bloomberg News response.

The Federal Reserve unleashed an unusual attack Tuesday on Bloomberg News, charging in a letter to members of Congress that stories about its bailout programs “have contained a variety of egregious errors and mistakes.”

The letter, signed by the Fed chairman, Ben S. Bernanke, showed that the central bank remains deeply concerned that public anger about its actions during the financial crisis will have political consequences, like new limits on its freedom of action.

The letter did not name Bloomberg, but the details make clear that the Fed is responding to an article by Bloomberg Markets magazine that was published last week. The article reported that cheap loans from the Fed allowed banks to pocket about $13 billion in profits during a two-year period ending in March 2009.

The article also reported that the central bank provided $7.8 trillion in total aid during that period, more than half to the nation’s six largest banks.

The Fed said that it disputed both calculations. The letter notes that the volume of loans outstanding at any one time never exceeded $1.5 trillion. And it says that those loans generally carried interest rates above the market rate, meaning that banks did not generate additional profits by leaning on the Fed.

A Bloomberg News spokesman, Ty Trippet, said: “We have met with the Fed numerous times on this issue and not once has the Fed ever told us our reporting on this issue is inaccurate. We stand by our reporting.” The organization also issued a point-by-point rebuttal.

The Fed letter also airs a number of other complaints, none of which obviously amount to an “egregious error” or a mistake. For example, it says that journalists should not describe Fed programs as secret because the central bank publicized the amounts that it lent, even though it refused to identify the recipients.

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