ECB Lends Record 442 Billion Euros for 12 Months

June 24 (Bloomberg) -- The European Central Bank said it will lend banks 442 billion euros ($621 billion) for 12 months, the most it has ever allotted in an auction, as it steps up efforts to unblock credit markets in the 16-nation euro region.

The Frankfurt-based ECB filled all bids in its first offer of 12-month loans to banks at the current benchmark interest rate of 1 percent. The 1,121 banks that participated receive the funds tomorrow. The euro interbank offered rate, or Euribor, for 12-month loans fell to 1.57 percent today, a record low.

“It’s even more than our most optimistic scenario would have suggested,” said Christoph Rieger, a fixed income strategist at Commerzbank AG in Frankfurt. “There is so much liquidity around that it will push money-market rates to new record lows.”

The ECB, battling Europe’s worst recession since World War II, is concentrating its efforts on lubricating the banking system, which accounts for about three quarters of company financing in the region. The central bank has cut interest rates to the lowest on record and will next month start buying 60 billion euros of covered bonds to help free up credit.

Today’s allotment is “broadly equivalent to one third of all sovereign issuance in the euro zone this year,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London. “It’s a big number, providing the intended monetary easing by stealth. I suspect that the ECB is very pleased.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZhZvQc0E_Eg

I would like to be a fresh established bank with a sober balance sheet and take on some debt at these low interest rate levels...

 

You can't focus on how the ECB is expanding their balance sheet, Sus. You have to focus on the Fed. I mean, come on dude. Get with what's popular. Ignore EU bad news, focus on US bad news.

 

Borrow at 1% from the central bank for 12 months and buy 2y bunds at 1.42% taking a bit of interest rate risk

 

ECB doesn't lend unsecured, so you'd better own or borrow some collateral to give them.

Makes the whole proposition a bit less of a no-brainer, for all the obvious reasons.

 

Is this any different from a 1 year TARPing (with exception to the better rates and terms the bank gets from here), where the result will just be a blowup in the ECB money base offset by an equal blowup in excess reserves ?

 

Hmmm, not sure what you're saying...

Isn't TARP, basically, unsecured? As to the money base, I don't think the broader aggregates should be affected, which is what the ECB cares about (rate of growth of M3).

 

As I understand the ECB has been liberal in their mortgage collateral requirements, so the bank can use their own lending to speculate on the low risk carry trade

 

You're right ... I forget the mechanism for the blowup of excess bank reserves (started ramping up Oct 1 08, thought it was TARP when I wrote this .. but obviously was a fed program; I forget which one... pick an acronym: TAF, etc..) The point being the same, M2/M3 unaffected while the money is just stuck in the banks (to quell insolvency fears).

http://www.federalreserve.gov/releases/h41/hist/h41hist9.txt for the data.

 

It seems that the idea behind the ECB program is affecting the term structure. Locking in 1% for 12 months, prior to that the cost would been higher with the overnight euro rate 1% plus the cost of hedging that rate for 12 months in some kind of futures/forward market

 

The idea behind the ECB program is to proactively deal with any liquidity concerns people might have about EUR banks, especially over year-end (so I agree with you, scriabin, although there's an expectation that some of this money will find its way into the interbank mkt. Not unsecured, mind you).

The fact that this affects the term structure (the EONIA curve is arnd 10bps lower) is just a by-product of the expectation of lower realized EONIA fixings going fwd.