Banks lap up massive ECB cash injection

Tim Wallace
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EUROPE’S banks borrowed another half-trillion euros at rock bottom interest rates yesterday as the European Central Bank (ECB) again pumped the system full of cheap cash.

Bank stocks rose after 800 firms took part in the second three-year long-term refinancing operation (LTRO), borrowing €529bn (£443.3bn) at one per cent interest rates, taking the total lent to over €1 trillion.

British part-nationalised bank Lloyds was one participant, borrowing £11.4bn “to fund a pool of non-core euro-denominated assets”.

The aim is to take bad assets off banks and boost liquidity, preventing a collapse which would devastate the already very weak economy.

The first LTRO in December saw 523 banks borrow €498bn. That operation was credited with staving off a new credit crunch, and the borrowing costs of the likes of Italy and Spain plummeted as the risk of a banking system bailout receded and banks had more cash to invest in sovereign bonds.

Yields on 10-year Italian and Spanish bonds fell to 5.188 per cent and 4.99 per cent respectively yesterday – well below the high levels seen last year.

But economists warned the measures are not enough by themselves to permanently fix the banking system’s problems.

“The ECB’s actions do not address the underlying structural issues in the banking sector,” said a report from Standard and Poor’s. “Issues include capital shortfalls at various banks, the questionable viability of some business models in the medium term, and continued uncertainty over the appropriate carrying values of assets such as certain sovereign exposures.”

The agency believes the LTRO does give banks more time to clean up their balance sheets and adapt to new rules, and so expects further deleveraging and downsizing over the next year.