As the FT reports, the European Central Bank has pumped a record €442.2bn into the eurozone banking system in its first-ever offer of unlimited one-year funds.
Respective euro rates fell to record lows following the move, as can be seen below. Here’s Eonia:
Euribor:
Meanwhile, in the overnight market the euro Libor spread jumped to 1.275 from 0.68 as banks sought out funds to tie them over until the auction:
As Julian Callow from Barcap notes, from the point of view of driving down rates , the auction can definitely be considered a success. From the point of view of reserves, however, the auction now leaves the banking sector with a stash in excess of some €270bn. As he states:
In turn this results from a record participation of banks in an LTRO – 1121 banks participated today (in contrast, the number of banks bidding in the weekly ops is generally in a range of 500-550, while in the longer-term refis the number of banks bidding is generally around just 100).
In other words banks saw this as a once in a lifetime bargain basement opportunity to stock up on euro cash, perhaps irrespective of needs. A bit like coming back from a sale with lots of items you didn’t necessarily need, but felt compelled to buy because the offer was just too good to ignore. Of course this sort of behaviour not only leaves you with a load of useless clutter, but also feeling guilty and unlikely to shop again for some time.
Could this also be a possible side-effect for the banks in the days to come? Callow notes:
The drawback of leaving a lot of excess liquidity in the system is that it might reduce money market activity, and it may look somewhat like a step backwards in the normalisation process of money markets that has developed over the past few months (with once again low EONIA/high deposit facility usage).
Although having €270bn in excess reserves sounds awfully convenient for dealing with the $283bn worth of losses the ECB projected might still come out of European banks this year.
Related links:
Eurozone banks face $283bn in losses – FT Alphaville
Allocating the ECB’s credit easing – FT Alphaville