ECB sees refinancing as big draw for banks seeking cheap money

Written by Reuters | Frankfurt | Updated: Aug 28 2014, 08:04am hrs
The European Central Bank expects banks to flock to its new ultra-long loan offering in September, regardless of the weak economic outlook for the euro zone, primarily because they need to refinance an earlier round of such borrowing. Whether the new funds will actually reach companies and households as intended by the ECB is less clear.

Banks have until Thursday to submit lending reports to the ECB to determine how much they can borrow in September and December under the new four-year loan programme, called TLTROs, which aims to push banks to lend more to the real economy.

But disappointing growth data and uncertainty over the economic implications of conflicts in Ukraine and Iraq have raised questions among analysts over the programmes ability to boost lending if loan demand remains subdued. The cheap loans remain attractive for banks regardless.

We should remember that the (previous) three years (programme) will be maturing in February 2015, said Ulrich Bindseil, the ECBs director general of market operations, who oversees the implementation of the TLTROs.

The TLTROs will partially substitute other forms of central bank liquidity, like the expiring (loans), but also shorter term central bank operations and funding in the market, Bindseil told Reuters.

There are overall 362 billion euros ($477 billion dollars) left from the ECBs last round of longer-term refinancing operation, launched during the blocs debt crisis in late 2011 and early 2012 to help banks through a period of strained funding. The last of these loans expire in February 2015.

Several banks used the cheap funds at the time to replace more expensive funding and make profits by buying up higher-yielding sovereign debt.

This time, the ECB is trying to channel the funds to the real economy by letting banks to borrow up to the equivalent of 7% of their loan exposure to businesses and households. And the banks only get to keep the loans for the full four-year term if they keep lending to consumers and companies.

But the ECB cannot direct how the cheap money is spent and with the loans only costing the banks 0.25% many analysts believe lenders will again use the money to buy higher yielding bonds to boost their profits rather than lend more to companies.

Most euro zone banks no longer face funding shortages and the sector recently started loosening its lending terms for businesses for the first time since the start of the crisis.

But even banks that do not participate in the new programme may benefit from easier funding conditions as their competitors are expected to issue less bonds for funding. The smaller supply of such bonds is expected to push down the cost of borrowing.