Last updated:December 8, 2011 1:59 pm
ECB launches new support for banks
The European Central Bank on Thursday announced a host of new non-standard measures aimed at supporting the region’s ailing banks.
The central bank will offer two new long-term refinancing operations, or LTROs, that will last for 36 months.
The central bank’s range of acceptable collateral, or the securities it takes in exchange for providing loans to banks was also widened, with ratings thresholds reduced and loans to small- and medium-sized enterprises made acceptable for the first time.
Europe’s banks have been locked out of traditional funding markets in recent months, unwilling and in some cases unable to tap investors for new liquidity. That has left many of them reliant on the central bank, but even with that support there have been concerns that some banks may run out of collateral needed to obtain ECB liquidity.
Speaking at a press conference after the ECB announced a quater point cut in its main policy rate to 1 per cent, Mario Draghi, president, said the measures announced were “meant to address the funding pressure.”
Mr Draghi noted that many banks remain unable to sell their debt into the market and face a large refinancing hump next year as government-guaranteed bank bonds mature. The worry is that banks may shrink their balance sheets and cut lending to the real economy, as one way of dealing with the funding freeze. “We are observing a deleveraging process by the banks,” Mr Draghi said, noting that “there are funding pressures” and “pressures on capital ratios.”
The first of the new long-term refinancing operations will be offered on December 21, and replace a previous 13-month LTRO announced back in October. The LTROs will provide unlimited longer-term financing for the banks.
“The measures should help significantly boost interbank liquidity and hopefully over time will reduce counterparty risk and spur further lending,” Andrew Wilkinson, economist at Miller Tabak & Co, said in a note to clients.
The cut in interest rates for a second consecutive month is a response to the region’s escalating debt crisis and darkening economic prospects and followed a cut of the same size in November, at the first governing council meeting chaired by Mr Draghi.
He said the decision was not unanimous.
“It was a lively discussion. Though one shouldn’t overplay the word ‘lively’. We are central bank governors after all,” said the central bank president.
Mr Draghi has hinted that a deal on Friday by politicians on a eurozone fiscal “compact” could pave the way for the ECB to intervene more aggressively in government bond markets – a step many economists see as crucial to resolving the crisis.
“I’m convinced that while today’s measures are strictly monetary in nature, Draghi is in the loop on what EU leaders will propose on Friday on the second day of the summit. His fiscal message has landed with great force on the desks of European leaders who know that the central bank is the linchpin in rescuing the region from sure collapse,” Mr Wilkinson added.
Highlighting tensions in the eurozone banking system, use of the ECB’s emergency lending facility rose again on Wednesday to €9.4bn, the highest since early March. With the overnight “marginal lending facility” incurring a penal 2 per cent interest rate, its heavy use over the past week has pointed to an acute problem somewhere in the financial system. The amount borrowed had been expected to fall after this week’s regular offer of seven-day liquidity.
The European Banking Authority is due to release final estimates for banks’ capital shortfalls later on Thursday, as regulators seek to fortify the region’s financial system against the eurozone turmoil. The EBA said in its preliminary estimate, released in October, that the region’s lenders need to raise a collective €106bn.
Additional reporting by Claire Jones in London
Copyright The Financial Times Limited 2011
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