Mario Draghi has asked a European Central Bank panel to study options for new bank funding measures, as policy makers try to figure out how to deal with any future liquidity shortages, two euro-region central bank officials said.
While the ECB president insisted that the institution “stands ready to act according to need,” the governing council agreed that a technical committee should examine the size and maturity of new long-term refinancing operations, as well as other instruments, the officials said yesterday, speaking on condition of anonymity because the matter is confidential. The panel has no set date for a verdict, one official said.
The ECB is trying to make cash operations available to banks in case increases in money-market rates caused by the winding down of stimulus by the U.S. Federal Reserve threaten the economic recovery. Draghi fueled expectations of a fresh round of long-term loans on Sept. 23, when he told European Union lawmakers in Brussels that officials could deploy a new LTRO if needed.
“The intention of the governing council is to provide liquidity assurance to the banking system,” Draghi said at a press conference after the ECB kept its benchmark interest rate on hold at a record low of 0.5 percent in Paris yesterday. “Nobody wants to have a liquidity accident standing between now and a recovery.”
An ECB spokeswoman declined to comment on the matter, and referred to Draghi’s press-conference remarks.
“It’s a fact that before the parliament, Mr Draghi was very specific with regards to an LTRO,” Nick Matthews, senior European economist at Nomura International Plc in London, said in a telephone interview. This “suggests that it is something that he did want to bring to the forefront of the markets attention or at least raise the awareness or the possibility that this could happen,” he said. “Currently we are still very much in a mode where the ECB are waiting and watching to see what happens.”
On the minds of the governing council, which represents the euro-area’s 17 members plus six members of the executive board, may be the pace of repayment of the ECB’s last round of 3-year loans, made in late 2011 and early 2012 as the region faced a credit crunch.
Another LTRO “is a matter of when rather than if, though timing is complicated by various factors,” said Ken Wattret, chief euro-area market economist at BNP Paribas SA in London, adding that he welcomes the move to explore options. A decision by committee and the lack of a deadline “might suggest that an announcement is probably not imminent,” he said in a note to customers.
“The ECB can provide liquidity as long as necessary from the point of view of the cyclical situation, exceptional situations,” Nick Kounis, head of macro research at ABN Amro NV in Amsterdam, said in a telephone interview. “But if there are structural issues with some banks where they need liquidity -- effectively endlessly: is the ECB the answer?”
As banks pay back the loans early against the backdrop of a nascent economic recovery in the euro area, excess cash in the system has dwindled from 813 billion euros ($1.1 trillion) in March 2012 to 220 billion euros this week. That threatens to push up borrowing costs too quickly.
“It’s a very diverging picture,” said Kounis. While the use of ECB facilities by “core banks” is normalizing, there is still some “exceptional use” by periphery banks, he said.
The overnight rate that banks expect to charge each other 12 months from now, as measured by Eonia forward contracts, was at 0.22 percent today, compared with 0.3 percent on Sept. 5, the date of the ECB’s last rate decision. Even so, the rate was at less than 0.1 percent in May.