Banks to repay ECB €137 billion in loans

2
278 banks repay ECB loans earlier than expected

A number of euro zone banks have stepped forward to make €137.2 billion in early repayments on the three year emergency loans they received from the ECB.

The European Central Bank launched the unprecedented €1 trillion loan operation in two tranches at the end of 2011 and again in February 2012.

The programme was an attempt to relieve stress on banks at the height of the debt crisis in the euro zone. 

The aim was to ensure they had enough funding to do business so that the flow of credit to the economy was not squeezed.

The loans have been credited with easing the region's debt crisis by tackling fears that one or more of its shaky banks might fail.

At the time the programme was launched, banks were given the option to pay back these loans early, with the repayment window opening at the end of January.

Analysts have been eager to see how many banks would join the scheme, as it would give an indication whether parts of the euro zone's financial system were returning to health.

The ECB said 278 lenders will make early repayments on January 30. Economists' forecasts for repayments had ranged between €100 and €200 billion.

In keeping with the ECB's usual practice, the central bank identified neither the lenders involved nor the countries they come from.

However, Belgium's KBC Bank said earlier that it has repayed €8.3 billion in funding it received under the ECB's Long Term Refinancing Operation.

The bank took a €3.5bn loan through the LTRO in December 2011, which was almost exclusively used by KBC Bank Ireland to make it less dependent on funding from its parent company.

''Given the substantially improved condition of the wholesale funding market and KBC's very solid liquidity position, we decided to repay the LTRO,'' commented KBC Group's CFO Luc Popelier.

''KBC boasts a strong retail and corporate deposit base in our core markets and our wholesale funding needs for 2013 are well advanced in terms of coverage. After three weeks in the new year, we have already covered a quarter of our needs,'' he added.

As well as helping banks, the ECB loans also provided indirect relief to heavily indebted countries, such as Spain and Italy, which were facing high borrowing costs in bond markets.

Flush with cheap credit from the ECB, banks started buying government debt. That raised bond prices and lowered bond interest rates, which equates to lower borrowing costs for the struggling countries.

The ECB lent €489 billion to 523 banks in late December 2011 at what was then its current interest rate of 1% and another €529.5 billion to 800 banks at the end of February last year.

The ECB's benchmark interest rate was since lowered to 0.75%, meaning banks can get short-term funding from the central bank at an even cheaper rate.