ECB Lends to Banks to Keep Credit Flowing

The European Central Bank says it will lend European banks 489 billion euros ($645 billion) in 1,134-day loans, a move that sets a record: the most in a single operation. It is also more than expected by economists, who had forecast a median estimate of 293 billion euros in a Bloomberg survey.

The three-year loans begin Thursday, according to a Bloomberg report, and are an attempt to keep credit flowing throughout the eurozone at a time when austerity and cost-cutting measures are spreading everywhere. The money will be lent at an average of the ECB’s benchmark rate of 1%.

The ECB has also expanded the kinds of collateral banks can use to obtain loans, as it seeks to keep them lending to households and businesses at a time when they are reluctant to risk parting with funds and when the cost of credit is on the rise.

Michael Schubert, an economist at Commerzbank in Frankfurt, commented in the report, “What the ECB wants is that the funds be used by banks to keep handing out loans. But there’s a second argument, which is to do carry trades by borrowing on the cheap at the ECB and buying sovereign bonds. We don’t know what the banks are using the money for.”