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ECB Says Banks to Repay 5 Billion Euros of Three-Year Loans

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Feb. 8 (Bloomberg) -- The European Central Bank said banks will repay 5 billion euros ($6.7 billion) of its emergency three-year loans next week.

A total of 21 financial institutions will use the third opportunity for early repayment of the first three-year loan, the Frankfurt-based ECB said in a statement today. Banks have returned 140.6 billion euros of the long-term funds in the past two weeks. The ECB’s first loan totaled 489 billion euros and banks can make early repayments on a weekly basis after a year.

While the ECB doesn’t provide a breakdown of the institutions returning the loans, some banks have indicated that they’re handing money back. Banco Santander SA said it returned 24 billion euros of the longer-term refinancing operations and Banco Bilbao Vizcaya Argentaria SA, or BBVA, gave 8 billion euros back.

“The repayment of the LTRO is a sign of confidence,” ECB President Mario Draghi said yesterday. Repayments “are at the discretion of the counterparties, who must appropriately assess their funding situation, their ability to provide new loans to the economy and their resilience to shocks.”

The ECB’s balance sheet shrank to the smallest in almost a year after banks started to repay the loans. Less liquidity in financial markets boosted banks’ borrowing costs. The rate on three-month Euribor futures expiring in December 2013 rose to as high as 0.58 percent last week from 0.25 percent at the beginning of the year.

Draghi said excess liquidity should remain “well above” 200 billion euros even if banks take the opportunity later this month to repay funds borrowed in the second three-year operation. A total of just over 1 trillion euros was lent over the two tenders.

“We will exert vigilance to ensure that, notwithstanding the legitimate decisions of individual banks to reduce their liabilities to the central bank, the overall liquidity conditions prevailing in the money market will remain consistent with the degree of accommodation that the current outlook for prices and real activity warrant,” ECB Executive Board member Peter Praet said on Jan. 29.

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net