June 30, 2010
E.C.B. Auction Provides Reassurance on Banks
By DAVID JOLLY
PARIS — Europe’s financial institutions sought far less money from the European Central Bank on Wednesday than many analysts had expected, offering some reassurance about the health of the euro-region banking system.
The offering had seized investor attention because it came just before a Thursday deadline for 1,121 banks have to repay €442 billion, or $540 billion, in one-year crisis loans that the E.C.B. extended in June 2009 to unfreeze lending in the 16 euro-zone countries. The end of that program could mark a tentative step toward weaning the financial system off of life support.
Although the financial crisis has eased since then, new worries about the safety of sovereign debt issued by several European countries has made the Continent’s banks nervous once again about lending to each other. The refinancing operation Wednesday had been watched for indications of how extensive the problem is.
In the end, the E.C.B. said 171 banks would be allotted €131.9 billion in three-month funds at a fixed 1 percent rate. That was well below the forecasts of analysts surveyed by Reuters, who had expected banks to ask for about €210 billion.
“The fact that we’ve got such a small number of loans being rolled over shows the euro-area banking system isn’t as stressed as people were fearing,” Peter Westaway, chief European economist at Nomura International in London, said of the result.
“In normal circumstances, banks should be able to lend to one another,” said Mr. Westaway, who had been expecting demand for the three-month loans to approach €300 billion. “The interbank market had become dysfunctional, but this suggests that things are better than they were.”
Bank stocks and the euro gained after the E.C.B. announcement, and the cost of insuring euro-zone bank debt against default with credit default swaps fell. On Tuesday, fears that the three-month auction would show that banks were depending more heavily on the central bank had weighed on global stocks.
Some monetary policy watchers have argued that the markets were exaggerating the importance of the expiration of the 12-month funding program, as E.C.B. officials have stressed in recent weeks that the central bank was committed to ensuring adequate liquidity.
Jean-Claude Trichet, the E.C.B. president, told reporters in Rome that the €131.9 billion “was below what some analysts had expected, but it was it was for us the normal transition that we had in mind.”
Analysts noted that there was never a likelihood of banks borrowing the full €442 billion Wednesday at one operation before turning around to repay the E.C.B. a day later with its own funds.
Marco Troiano, who covers the banking industry at Standard & Poor’s Equity Research in London, said it was possible that some of the crisis lending had gone not to banks’ “core” business, but instead to finance speculative trades in which they funded themselves from the E.C.B. and invested at higher rates, although in liquid assets. Banks would easily be able to liquidate some of these trading positions to reduce their short-term funding needs and meet E.C.B. repayments, he said.
The European Union, the E.C.B. and the International Monetary Fund have taken a number of significant steps to stabilize the euro zone since the Greek debt crisis began this year, notably a €750 billion program to help governments finance their debts when doing so on the market had become prohibitively expensive. The E.C.B. agreed as part of that program to buy government and corporate bonds on the market to ease credit.
In their latest confidence-boosting effort, E.U. governments are carrying out individual “stress tests” on the region’s financial institutions. The European Union has said it will publish in July the results for 25 major banks.
Michel Barnier, the E.U. commissioner for monetary affairs, has likened the bank tests to earthquake tests that are performed on buildings: “It doesn’t mean an earthquake will hit tomorrow morning, but one never knows, and one must test the solidity of the walls and the foundation,” Mr. Barnier said on French radio late last week.
He added that he was in favor of making the results of the tests public and of extending the tests to “other European financial firms that do cross-border business.”
There is still some doubt about the utility of those tests, as investors have been concerned that soured loans have been secreted away on the balance sheets of institutions like Germany’s Landesbanken and Spanish savings banks, which may not be covered by the assessments.
On Wednesday, the German central bank, the Bundesbank, and the BaFin market regulator jointly issued a statement from Berlin saying that the country’s big banks were prepared to participate in the tests “on the basis of uniform, Europe-wide rules” as soon as the criteria were made available.
The assessments could ultimately lead national governments either to nationalize or to recapitalize some of their worst-hit banks.
Mr. Westaway said the stress tests could go a long way toward restoring calm, noting that similar assessments by the U.S. Treasury last year “were sort of the beginning of the end in terms of uncertainty” for American banks.
“What kills markets is not knowing whether your counterparty is able to trade with you,” Mr. Westaway said.
James Kanter contributed reporting from Brussels.