March 9, 2012
The volume of refinancing operations conducted by the European Central Bank (ECB) has expanded hugely since the middle of 2011. One important driver was the two 3-year LTROs (longer-term refinancing operations) announced by the ECB at the start of December 2011. This monetary policy measure enabled European banks to borrow unlimited funds from the ECB for three years at the end of December 2011 and at the end of February 2012. The interest rate to be paid will correspond with the average interest rate for regular refinancing operations during the term (currently 1%). The total volume of ECB refinancing operations rose markedly by the beginning of March to EUR 1130 bn on account of the two 3-year LTROs.
The share of German banks in ECB refinancing operations dropped relatively constantly from more than 50% in early 2007 to around 6% in January 2012 (hitting bottom at 3 ½% in November 2011). Although the share of German banks may have again increased slightly with the second LTRO (Bundesbank data will be published at the end of March) the size of the German economy means that even then this share would remain small.
There are several (interrelated) reasons why:
- The exposure of southern European banks to their domestic crisis-wracked government bond markets has resulted in many of these banks losing access to alternative sources of refinancing (deposits and the interbank market) and therefore having to fall back on ECB operations. Spanish and Italian banks each took up nearly ¼ of the first 3-year tender, whereas the German share came to about 5%. (National data on the second 3-year LTRO will only be published with a time-lag.)
- At the same time German demand for ECB loans is falling significantly as huge amounts of liquidity are flowing into Germany because its banks are seen as safe havens during the ongoing European sovereign debt crisis.
- The major uncertainty in financial markets led to the European interbank market largely drying up even for banks from “non-crisis countries”. This means that European banks are hardly lending each other any money. Instead, some are drawing their liquidity directly from the ECB, while others are “parking” money with the central bank.
