BANKS flooded the European Central Bank (ECB) with demand for dollars yesterday, taking out $50.7bn in three-month loans – five times what many analysts expected.
The demand from 34 dollar-hungry banks came after six central banks agreed to slash the price they charge to lend out the greenback in response to a dollar credit crunch.
The ECB charged just 0.59 per cent for the loans, significantly above the three-month dollar London interbank rate – or private market rate – of around 0.4 per cent.
In addition, five banks took out one-week dollar loans amounting to $1.6bn.
The flood of demand underscores the depth of the funding problems plaguing the interbank market. Capital markets bankers say that there is a severe shortage of dollars, which is more of a problem for banks than the rising use of collateral to issue debt.
The funding drought is being exacerbated by banks’ inability to offload trillions in assets earmarked for disposal.
According to research by accountant Deloitte there are €1.7 trillion of non-core or under-performing assets on the balance sheets of European banks.
But banks’ ability to sell these assets is hampered by a “pricing gap”, whereby lenders are unwilling to crystallise losses by taking knock-down prices on assets that have not been marked to market because instead of raising capital, doing so would erode their capital base.
The lack of buyers means they cannot get the prices they want, however, which leads to assets simply sitting on balance sheet taking up funding.