Concern is mounting among senior bankers that the European Central Bank’s special longer-term funding scheme risks backfiring, stigmatising the region’s weaker banks a year after it was launched.

From the end of January banks have the opportunity to start paying back the cheap three-year money they borrowed under the ECB’s longer-term refinancing operation.

But with stronger banks expected to repay and weaker institutions still in need of the funds, bankers fear the early repayment window will hasten the advent of a two-tier banking market in the region, potentially reigniting eurozone nervousness just as sentiment is brightening.

“We will repay the money early,” said one bank boss. “But there is a risk that this creates a stigma for the banks that are left in.”

On Thursday, several banks announced repayment plans. They included Lloyds, which is repaying 75 per cent of the €13.5bn it took a year ago to finance its shrinking business in Ireland, Belgium and the Netherlands.

Germany’s Commerzbank stated publicly last year that it planned to repay early. And Société Générale is also planning a similar move. Some smaller Spanish banks pledged repayments too, though mostly only small portions of the funds borrowed.

Analysts expect between €100bn and €200bn of the total €1tn of LTRO money to be repaid in the first quarter of 2013, largely by banks from northern Europe. The funds carry a low interest rate of 75 basis points.

When it was launched by ECB president Mario Draghi in 2011, the LTRO was hailed as a decisive move to restore confidence in the financial system. Many stronger banks, which had been frozen out of bond markets, found commercial issuance became possible again, as investors were reassured by the ECB backstop.

Now, though, according to several top financiers at the Davos World Economic Forum, there is a growing impatience to exit the LTRO among banks that are flush with liquid funds. In some cases large chunks of banks’ ECB borrowing simply remain on deposit at the central bank, making the banks’ balance sheets inefficient.

Many lenders say they only signed up to take funding in the two-stage scheme, in December 2011 and February 2012, because they were encouraged to do so by the ECB in an effort to destigmatise the LTRO.

Jan Hommen, chairman of Dutch bank ING, which did not draw funds under the scheme, told the Financial Times: “We always felt there could be a stigma about it. That did not happen because Draghi persuaded so many people to participate but it could return now.”

Bankers and analysts believe that once the repayment trend among stronger banks takes hold, second or third-tier eurozone banks, particularly in the southern periphery in Europe, could look vulnerable.

Many have large amounts of non-performing loans and little or no access to capital markets. RBS analysts say another LTRO aimed at smaller banks is quite possible in the first quarter of 2013.

Get alerts on Commerzbank AG when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article