Results from the ECB’s latest 1-year financing auction, held on Tuesday, revealed that the central bank allotted €75.24bn to eurozone financial institutions, much less than the €137.5bn analysts had expected.
To compare, the ECB’s previous auction, in June, saw €442bn of funds allocated.
The easiest way to interpret the drop in allotments, as Bloomberg notes, is to say that banks’ cash-needs must have eased:
“That it came that low is a bit of a surprise,” said Jan Misch, a money-market trader at Landesbank Baden-Wuerttemberg in Stuttgart. “However, even expectations for anything beyond 100 billion were exaggerated in the first place. There isn’t just any major need for liquidity.” The ECB, which will offer banks 12-month loans for a third time on Dec. 15, is flooding the system with money in the hope it will be lent on to companies and households.
However, there is another interpretation.
Marc Ostwald of Monument Securities points out in a note on Wednesday that a lack of of ‘qualifying collateral’ within the eurozone banking sector might, arguably, also have been behind the drop in demand. This makes sense if you consider the ECB has been hinting it might become more selective on the collateral it accepts, observes Ostwald.
But there’s another, perhaps more persuasive, explanation still, according to Ostwald. The ECB may have been putting pressure on banks to address their long-term refinancing needs over short-term liquidity grabs, especially now that interbank rates have fallen and the covered bond market has started to pick-up again.
As Ostwald explains (our emphasis):
A more plausible scenario is that there has been a shift in emphasis:
a) Euro LIBOR / EURIBOR rates have been crushed since the June 24 1-yr LTRO, and that a further flood of liquidity offers the banking sector few if any benefits, indeed it might do more harm than good in terms of driving term rates down.
b) The ECB has probably been stressing to the Eurozone banks that rather than focussing on hoarding lots of still relatively ‘short-term’ liquidity, they (the banks) should actually be focussing on the mountain of debt refinancing that they need to manage over the next 2-3 years, and with the covered bond market now fully functional (the ECB would doubtless claim that this is down to their own covered bond purchase programme), banks should be using the cheap financing rates available on covered bonds (typically +35 to +65 bps over swaps, depending on maturity and name, while senior unsecured would cost about 100-150 bps more) to get on the road to obtaining long-term financing and liquidity.
The deluge of covered bond issuance from just about any and every name in Europe over the past two weeks, which looks likely to continue at a deluvial pace, would certainly appear to support this.
Once again, one can only complement the ECB for its market management skills ……
Related links:
Why the ECB is a good bank with rubbish assets – FT Alphaville
The ECB ‘liquidity monster’ – FT Alphaville
Los covered bonds, por favor – FT Alphaville
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