MONEY MARKETS-Banks’ dependence on ECB cash eases

by on September 26, 2012 12:52 pm BST

Wed Sep 26, 2012 8:52am EDT

* Borrowing declines at three-month ECB lending operation

* Excess liquidity drops 40 bln euros in September

* Liquidity drop positive but market funding still tricky

By William James

LONDON, Sept 26 (Reuters) – Euro zone banks have cut their
borrowing from the European Central Bank as confidence slowly
creeps back into the embattled financial sector and reduces the
desire to hold large liquidity buffers.

Bank borrowing fell by 7.6 billion euros at the ECB’s offer
of three-month cash on Wednesday, contributing to a 40 billion
decline in excess liquidity in September, according to Reuters

Banks still have loans outstanding from the ECB of a huge
739 billion euros above their estimated needs but that amount is
edging lower as the latest plans to defuse the euro zone debt
crisis improve the outlook for financial institutions.

The ECB said earlier this month it would buy bonds issued by
struggling euro zone sovereigns if they submitted to a bailout
programme, a landmark step that has pushed sovereign yields
lower and opened up capital markets for banks.

“Some banks were using this (ECB) refinancing as a cushion
to avoid a liquidity crisis but now there is an opening in the
bond market, some banks have less concern,” said Alessandro
Giansanti, strategist at ING in Amsterdam.

Banks from the weak euro zone periphery have been rushing to
borrow in the bond market since the ECB unveiled its plans on
Sept. 6, including institutions that were unable to sell debt
for most of the year.


However, market participants said that while the decline in
dependence on ECB loans was a positive sign, it should not be

“This all seems to be pulling in the right direction, but in
the grand scheme of things there’s still a lot of liquidity out
there,” said Orlando Green, strategist at Credit Agricole in

Financial markets remain on edge over whether Spain, at the
leading edge of the sovereign debt crisis, will activate the
ECB’s bond-buying support and optimism is unlikely to grow much
further without Madrid applying for a bailout.

One interbank loan broker said there had been an increase in
lending activity related to the upcoming quarter end, but no
sign of unsecured credit lines opening up to new banks.

Despite some encouraging signs of increased volume in the
overnight lending, only the most highly regarded institutions
can borrow for longer periods without providing collateral to
their counterparty.