The European Central Bank (ECB) said banks will repay only half the amount of emergency loans economists forecast, indicating that financial institutions remain wary of lending to each other.
About 356 banks will hand back 61.1 billion euros (US$80.5 billion) of the ECB’s second three-year loans on Wednesday, the first opportunity for early repayment, the central bank said in a statement yesterday. That compares with a forecast of 122.5 billion euros made by economists in a Bloomberg News survey.
The ECB flooded banks with more than 1 trillion euros in two three-year loans after money markets froze because of Europe’s debt crisis. Banks have the option of repaying the funds after a year. Last month, they returned more of the first loan than forecast.
“Expectations after the initial repayment of the first loan became exaggerated,” said Jan Von Gerich, Nordea Bank AB’s chief fixed income analyst in Helsinki. “The current number shows much better how the banking sector is doing. We’re seeing improvements, but it is a slow process.”
The central bank expected “quite a substantial” figure yesterday, ECB Governing Council member Ewald Nowotny told reporters in Riga, Latvia.
Executive Board member Benoit Coeure, commenting after the number was published, said in Lisbon that “this is only the first instalment of the possible repayment.”
The ECB said nine banks will repay a further 1.7 billion euros from the first three-year long- term refinancing operation next week. That takes the total amount of funds repaid early to 212.3 billion euros, or 21 percent of the overall amount lent. Banks can continue to repay the loans over the coming weeks.
“The ECB will welcome the repayment as long as banks make it for the right reasons,” Nomura International PLC senior economist Nick Matthews said in London. “If banks are comfortable that they don’t need the money anymore or can get funding in the market, it’s alright. The last thing you want, though, is to see banks rushing to repay only to get into trouble because they don’t have their funding in place.”
ECB President Mario Draghi has urged financial institutions to be responsible in determining repayment amounts.
They “must appropriately assess their funding situation, their ability to provide new loans to the economy and their resilience to shocks,” he said on Feb. 7. “We will closely monitor conditions in the money market and their potential impact on the stance of monetary policy.”
Interest rates in the futures market surged last month after banks repaid three-year funds for the first time. The rate on three-month Euribor futures expiring in December this year rose as high as 0.58 percent on Jan. 28, the most since July last year.
Banks that have returned funds so far include Spanish lenders Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, or BBVA, and CaixaBank. Belgian, Portuguese and German banks have also handed money back.