EXCLUSIVE - ECB mulls ultra-long loans to help banks

BRUSSELS Thu Nov 24, 2011 11:31pm IST

A huge Euro logo is pictured past the headquarters of the European Central Bank (ECB) in Frankfurt, September 29, 2011.  REUTERS/Ralph Orlowski/FIles

A huge Euro logo is pictured past the headquarters of the European Central Bank (ECB) in Frankfurt, September 29, 2011.

Credit: Reuters/Ralph Orlowski/FIles

Related Topics

Rajalakshmi (C), 28, smiles after winning the Miss Wheelchair India beauty pageant in Mumbai November 26, 2014. REUTERS/Danish Siddiqui

Miss Wheelchair India

Seven women from across India participated in the country's second wheelchair beauty pageant, which aims to open doors for the wheelchair-bound in modelling, film and television, according to organisers  Slideshow 

BRUSSELS (Reuters) - The European Central Bank is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy, people familiar with the matter say.

The ECB is examining this unprecedented possibility as intensifying fears about the euro zone succumbing to its debt crisis hurt the interbank money market, with banks scaling down the list of peers to which they are ready to lend.

The central bank is looking into offering banks liquidity over a 2-year or even 3-year horizon, the sources said, aiming to free up the increasingly blocked interbank money market and give banks more leeway to buy and hold sovereign bonds.

To date, the longest term it has offered funds is one year.

As the sovereign debt crisis has worsened, the ECB has been coming under increasing pressure to intervene on a larger scale by buying state bonds but is reluctant to make such a commitment.

It does, however, have the freedom to lend banks trillions of euros and could use this firepower to indirectly support governments trying to issue debt.

The ECB has flagged the possibility of longer-term loans to banks, sources familiar with the matter told Reuters, in a move that could be aimed at gauging their interest ahead of a launch.

The possibility of lending over a longer time horizon was raised at a meeting last week between the ECB and a group of banks including Goldman Sachs, Barclays Capital and Morgan Stanley, according to one person familiar with the matter.

"What was said was that they would be prepared to offer two or three years LTRO (lending operations)," that person said.

"The question (for the ECB) is whether banks would be interested in it. It could be seen as a stigma if a bank was using 2 or 3-year financing with the ECB. It might not get enough take-up to make a difference."

Another source said the ECB was looking at the possibility of providing liquidity over a similar time horizon but by giving a series of shorter-term loans with the pledge to keep this line of credit open for up to three years.

A third official familiar with the matter said: "It's being discussed ... But there is no decision yet."

The ECB first introduced extra-long 12-month liquidity tenders in June 2009. Last month, it rewewed offers to lend banks one-year funding in two operations this year -- a 12-month longer-term refinancing operation (LTRO) in October and a 13-month operation in December. At these operations, banks receive all the funds they ask for.

There has, however, only been lukewarm interest, suggesting that more ECB cash may not be the answer to a creeping credit freeze.

Interbank markets remain tight, with banks worried about the health of their peers and also holding back cash as they face the prospect of having to set aside funds to cover potential losses on their sovereign debt holdings. International demands that they raise their capital base have exacerbated the problem.

This nervousness was highlighted on Tuesday when euro zone banks' demand for ECB funding surged to a two-year high, as fast spreading sovereign debt worries left lending markets virtually frozen and the ECB as the only source of funding for many institutions.

ECB Governing Council member Luc Coene said earlier this week regulators must ensure banks take account of the riskiness of government bonds they own, adding to pressure on banks to set aside more capital to cover such losses.

By offering banks liquidity for an ultra-long period of two or three years, the ECB could help to reinforce confidence in banks and also do the same for rocky sovereign debt markets.

"To the extent that you are improving the situation for banks, you are improving the situation for a major potential purchaser for sovereign debt," said one banker. "They will know that they can refinance with the bank (ECB)."

One senior executive from a European bank, speaking anonymously, said he favoured an extension of the terms under which the ECB lends to banks.

"Now, it's 13 months and if we could go to 24 months, that would be better. Thirty six months would be better still but then we are at the point of medium-term financing."

(Editing by Mike Peacock)



WTO Trade Deal

WTO Trade Deal

WTO clinches first global trade deal in its history  Full Article 

Kashmir Attack

Kashmir Attack

Ten dead in Kashmir's worst militant attack in more than a year  Read 

OPEC Meeting

OPEC Meeting

Saudis block OPEC output cut, oil price sinks further.  Full Article 

E-Commerce Boom

E-Commerce Boom

Online grocers come up trumps in India's e-commerce boom   Full Article 

GDP, RBI Preview

GDP, RBI Preview

GDP growth set to weaken, business wants reforms more than rate cut  Full Article | Related Story 

Jaitley to Rajan

Jaitley to Rajan

Jaitley likely to meet Rajan on Monday to urge rate cut  Full Article 

Banking Sector

Banking Sector

India moves to allow more businesses to offer basic financial services.  Full Article 

Jamini Roy

Jamini Roy

Photo Gallery – Bengali household name Jamini Roy’s paintings  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage