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Eurozone bank-loan demand high

The European Central Bank (ECB) said on Tuesday it would lend more than 334 billion euros (US$425 billion) during a regular weekly operation that underscored strong demand from eurozone banks.

A total of 848 banks requested the funds, the first to be lent at the ECB’s new benchmark rate of 3.25 percent following a half percentage point interest rate cut on Thursday last week.

The ECB satisfied all requests for one-week loans and was to disburse yesterday a total of 334.413 billion euros, it said in a statement.

It had estimated that banks needed 222.5 billion euros for the week to underpin lending operations, and the sharply higher amount indicated that banks were maintaining strong cash balances amid uncertainty generated by the international banking crisis.

“Banks are safeguarding their balance sheets to such an extent that they are now very reluctant to lend just when households and enterprises need credit to tidy them over some rough times,” Bank of America senior economist Holger Schmieding said.

The situation appears to be creating some frustration at the ECB, and its president Jean-Claude Trichet has pressed commercial banks to assume their responsibilities as purveyors of credit to the wider economy.

“It’s not a normal functioning, clearly that you have a lot of supply of liquidity which at the end of the day is in our deposit window,” Trichet acknowledged after the ECB announced its interest rate cuts.

Earlier on Tuesday, the ECB said that more than 209 billion euros were parked in its overnight deposit facility, which offers a rate of 3.25 percent, well below the going interbank market rate of 4.15 percent. That was a clear sign banks would rather lend money to the ECB, even at a lower rate of return, than to other banks amid prevailing market mistrust.

The ECB identified a large amount of excess cash in eurozone money markets and moved on Tuesday to mop it up with what it calls a fine-tuning operation.

The ECB’s forecasts “show that a large positive liquidity imbalance is expected” on the last day of period during which commercial banks must maintain minimum reserves.
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