ECB Offers Cheap Loans Again

Banks absorb more funding in three-year loans than anticipated

The European Central Bank once again offered cheap three-year loans to banks in the euro region, which quickly soaked up 529.5 billion euros ($712.2 billion) in funding. Analysts had expected the amount to total 470 billion euros.

Bloomberg reported Wednesday that 800 financial institutions availed themselves of the cheap money, and the sheer number of banks involved spurred hopes that this time at least some of it would find its way to the smaller businesses that rely on credit to keep functioning.

Much of the last round of cheap loans, offered by the ECB in December, ended up back on overnight deposits with the ECB as banks took advantage of the money to boost their balance sheets but did not loan it out.

Laurent Fransolet, head of fixed income strategy Barclays Capital in London, estimated that perhaps 300 billion of the total is new lending. He was quoted saying, “The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy. So the impact may be bigger than with the first one.”

The interest rate on the loans remains the benchmark 1%, a record low. The ECB has indicated that it does not intend to engage in a third round of such loans; it has already plowed more than a trillion euros into the economy through the two programs.

Still, not everyone is a believer in the strategy. Reuters reported that Mervyn King, Bank of England governor, said of the move, "The idea that the long term repo operations have eased the supply of finance to small businesses in the euro area is a myth. What it has done is to provide a source of funding to banks particularly in the southern member countries of the euro area which were experiencing a bank run, enabling them to fund the withdrawal of funds."

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