Money markets banks reliance on ecb funding easing

← Homepage

Oct 23 Euro zone banks' reliance on ECB funding eased again on Tuesday as the central bank's promise to provide aid if asked by for by Spain and Italy allowed some institutions to access, tentatively thawing funding markets. Banks borrowed 77 billion euros at the European Central Bank's weekly financing operation, down from 92 billion euros last week and taking the total decline since the beginning of September to almost 50 billion euros."Banks in peripheral countries are getting more access to money markets again," said Benjamin Schroeder, rate strategist at Commerzbank. "(They) have a better standing now."Sentiment towards the euro zone's main peripheral issuers Spain and Italy has improved markedly since the ECB in August outlined a plan to buy the bonds of the region's struggling countries if they asked for help. The two countries had been almost totally reliant on their domestic banks to buy their sovereign bonds, leaving the institutions stuffed with debt and struggling to raise funds as potential lenders worried about the effect of a collapse in value of that paper.

But with the ECB expected to act as a backstop, bond prices have recovered and some banks are tentatively finding their way back to the interbank lending market."We're seeing a few more overnight (credit) lines being put back in, but more for the Italian banks," one money market trader said. "But it's all very name dependent."Italian banks' borrowing at the ECB's weekly financing operations more than halved to just over 4 billion euros in September, compared with August, according to Bank of Italy data.

In Spain, there was a decline of just over 3 billion euros to 71 billion euros, Bank of Spain data showed. However at that time - the end of September - the total size of the weekly financing operation was still close to 120 billion euros."There's some scope for (Spain's borrowing) to drop further," Schroeder said.

With excess liquidity in the euro zone banking system still around 675 billion euros - albeit down around 100 billion euros since early September - some banks are expected to pay back some of the 1 trillion euros borrowed at two three-year financing operations. A Reuters poll last week showed two-thirds of money market traders expected some of the loans to be repaid because some banks had cheaper funding options. Meanwhile, the trader said there were also signs that banks were lending to one another for longer periods of time, with some prepared to part with their cash for up to 6 months."Lenders are still looking for the banks with better (credit) ratings, so, for example, the Scandinavian banks will pay a bit more yield and their ratings are still up so they can (borrow for longer)," he said. "We're seeing tiny shoots."Benchmark three-month interbank euro Libor rates eased to 0.13429 percent, while equivalent Euribor rates dipped to 0.203 percent.