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November 19, 2013 11:28 am
European banks have accelerated their repayment of more than €1tn in cheap central bank loans as they seek to burnish their balance sheets ahead of key stress tests by regulators next year.
Since the end of August, eurozone banks have paid back an average €4.6bn a week of the €1.1tn they borrowed from the European Central Bank, compared to an average of €3.6bn a week for the preceding six months, an increase of more than a quarter.
The ECB’s three-year longer-term refinancing operation, or LTRO, scheme was introduced in late 2011 as one of ECB president Mario Draghi’s signature policies to try and reduce the cost of banks’ funding and calm then turbulent bond markets.
Tim Skeet, a debt capital markets managing director at the Royal Bank of Scotland, said banks did not want to be seen as having to rely on LTRO funding for fear of being seen as weak.
“Banks don’t want to stick out,” he said. “The stress tests will be about how well can banks stand on their own two feet and so they’re concerned that they don’t look different from their peer group – that is strong, well capitalised and properly liquid.”
The figures come as eurozone banks are under increasing pressure to reduce the amount of LTRO monies they borrow for fear of being penalised by the European Banking Authority, the EU’s umbrella regulator. For its part the EBA plans to measure banks’ reliance on LTRO funds.
This month more than €10.6bn was paid back in a single week, the highest weekly amount since late April.
The first LTRO payback deadline is January 2015.
Eurozone banks have repaid €380.7bn of LTRO monies to date; there is €637.9bn outstanding according to ECB figures.
However, Mr Draghi has said the ECB, which expressed worries about money market lending rates creeping upwards, could yet initiate another LTRO to prevent a “liquidity accident”.
Analysts have said an extension of the existing LTRO would be one way out of a potential point of tension over the issue between the ECB, which is focused on averting crisis, and the EBA, whose priority is to test the system’s brittle points. An extended timeframe for the LTRO programme would mean the EBA would not need to consider the so-called “cliff risk” of banks shifting from cheap ECB financing to more expensive or non-existent market funding.
Meanwhile banks with previously limited access to capital markets are hurrying back to take advantage of investors’ yield lust.
Adrian Docherty, head of banking advisory at BNP Paribas, said some banks were keen to flaunt their capital raising prowess.
“Having too much LTRO close to maturity is tinged with negative overtones,” he said. “At the same time markets are much more receptive than they were a year ago so more issuers are coming to market at reasonable funding levels.”
The return to markets by eurozone peripheral banks includes those mid-tier banks perceived as a drag on the continent’s wider financial market recovery. These include Spain’s Banco Popular, Italy’s Veneto Banca and Banca Popolare di Vicenza, and Bank of Ireland.
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