A total of 523 banks borrowed €489.2bn (£407bn) in three-year loans in the ECB’s biggest ever funding exercise – over €100bn above consensus expectations. Regulators had encouraged lenders to take advantage of the cheap money.
The figure includes €45.7bn of one-year funding that banks had already taken out but opted to switch to three-year loans. Most lenders – 123 of 181 – using the one-year liquidity switched over, the Bank said.
Italian banks are believed to be some of the biggest borrowers as data out yesterday revealed that the country’s economy shrank 0.2 per cent in the third quarter of this year.
The dramatic upswing in demand for cheap funding comes as Europe descends into a full-blown credit crunch and banks are forced to write down the value of their sovereign bonds. Many used those bonds as collateral for their ECB funds.
Despite boosting its bank loans, the ECB has refused to lift the cap on its ongoing bail-out of states. The implicit hope, say economists, is that banks will pass on the liquidity by buying nations’ debt, which could be the reason behind recent falls in debt yields.
But Citi economist Guillaume Menuet warns that there is a fine line between that and “financial oppression”. “There is a risk that at some point it becomes coercive,” he said.