The European Central Bank would lend more than 334 billion euros (425 billion dollars) during a regular weekly operation which underscored strong demand from eurozone banks. It was estimated that banks needed 222.5 billion euros for the week and the sharply higher amount indicated that banks were maintaining strong cash balances amid uncertainty generated by the international banking crisis.
The funds were lent out by the ECB at the rate of 3.25 percent following a half percentage point interest rate cut.
"Banks are safeguarding their balance sheets to such an extent that they are now very reluctant to lend just when households and enterprises need credit to tidy them oversome rough times," Bank of America senior economist Holger Schmieding noted. The situation appears to be creating some frustration at the ECB, and its president Jean-Claude Trichet has pressed commercial banks to assume their responsibilities as purveyors of credit to the wider economy.
"It's not a normal functioning, clearly that you have a lot of supply of liquidity which at the end of the day is in our deposit window," Trichet acknowledged after the ECB announced its interest rate cuts.
Earlier on Tuesday, the ECB said that more than 209 billion euros were parked in its overnight deposit facility which offers a rate of 3.25 percent, well below the going interbank market rate of 4.15 percent. That was a clear sign banks would rather lend money to the ECB, even at a lower rate of return, than to other banks amid prevailing market mistrust.
The ECB identified a large amount of excess cash in eurozone money markets and moved on Tuesday to mop it up with what it calls a fine-tuning operation. The ECB's forecasts "show that a large positive liquidity imbalance is expected" during which commercial banks must maintain minimum reserves. The central bank held what is called a quick tender to absorb the extra cash, taking in 80 billions euros.
Banks were allowed to offer as much excess cash as they wished. Central banks have injected massive amounts of cash into interbank markets to encourage commercial banks to keep lending to businesses and households. When it identifies a surplus however, it removes the cash to prevent an excessive supply from fueling inflation and to keep market rates close to its own benchmarks.
2 comments:
Very interesting to hear about the more intricate aspects of the interbank market and how the Central banks are trying to ensure credibility and stability in these markets. I've heard so much about injecting money and fear of security of loans without any real specification of what this means. Amazing how during a crisis certain phrases become jargon almost instantaneously without any real understanding of the terms.
I wonder why this can happen without much news, but when something like this in the U.S. happens, people become furious and pointing fingers. Would something like this actually do any good in the U.S.?
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