Frankfurt, Germany (FT) -- European Central Bank hopes of a smooth return of €442bn of emergency loans it made to banks a year ago have been boosted after demand for three-month liquidity offered as an alternative fell far short of expectations.
Just €131.9bn in three-month liquidity was taken by 171 banks, the ECB reported on Wednesday. Analysts had feared that banks would demand €250bn or more.
The low figure suggested banks' nervousness about their future funding and inability to tap commercial markets might have been overdone.
On Thursday, more than 1,100 eurozone banks have to repay €442bn in one-year loans borrowed a year ago, when continental Europe was recovering from the worst recession since the second world war. It was the largest amount ever provided in a single ECB market operation.
Since then, the ECB has stopped providing 12-month liquidity, but offering three-month loans instead.
Worries about the impact of the change sparked sharp falls in financial markets this week and pushed the euro lower. Some Spanish and German banks voiced alarm that ECB funds were no longer being provided for such a long period, adding to uncertainty. But the euro rebounded after news of the low take-up of three-month loans, while key money-market euribor futures eased after the ECB announced the results.
European bank shares also rallied as signs of funding tensions eased.
At the heart of the eurozone, banks saw big gains. On France's Cac 40 index, BNP Paribas was up 3.2 per cent to €45.17, while Crédit Agricole rose 3.9 per cent to €8.67. Société Générale rose 2.9 per cent to €34.78.
The troubled periphery also saw significant rises. On Spain's Ibex 35 index, Bankinter jumped 4 per cent to €5.10, while Banco Santander was up 4 per cent to €8.78. Banco de Sabadell gained 2.2 per cent to €3.74.
The interest rate charged by the ECB for the three-month loans, in which the central bank met eurozone banks' demands in full, was 1 per cent -- higher than market interest rates. But analysts had expected banks might still take advantage of the offer on a precautionary basis.
Ahead of the offer, ECB figures suggested there was about €300bn of excess liquidity in the eurozone financial system, or about €200bn more than normal. Assuming banks were happy to return to more normal levels of liquidity, the return of the €442bn in one- year loans would still have left them looking for more than €200bn of funding from other sources.
The result of the three-month liquidity offer will please the ECB, which is keen to wean eurozone banks off its emergency liquidity and feared that providing loans on a 12-month basis was distorting financial markets. However, it is likely to wait before sounding the all-clear. On Thursday, the ECB is also offering unlimited liquidity for a period of six days, which will tide banks over until next week's offer of seven-day liquidity, when demand will also be met in full.
