ECB Says Banks Will Repay 3.5 Billion Euros of 3-Year Loans

The European Central Bank said banks will repay 3.5 billion euros ($4.8 billion) of its emergency three-year loans next week.

A total of 27 financial institutions will use the second opportunity for early repayment of the initial three-year loan, the Frankfurt-based ECB said in a statement today. Banks already returned 137.2 billion euros of long-term funds this week. The ECB’s first loan totaled 489 billion euros and banks can make early repayments on a weekly basis.

While the ECB doesn’t provide a breakdown of the institutions returning the loans, some banks have indicated that they’re handing money back. Commerzbank AG, Germany’s second-biggest lender, said it repaid 10 billion euros and Banco Popular Espanol said it gave back 1.3 billion euros.

“The very small repayment ought to help soothe concerns of a rapid normalization and drain of liquidity from the system,” said Nick Matthews, a senior European economist at Nomura in London. “We expect repayment amounts over the next few weeks to also remain low.”

The euro dropped a quarter of a cent after the report and traded at $1.3645 at 12.17 p.m. in Frankfurt. The rate on three-month Euribor futures expiring in December 2013 fell 6 basis points to 0.51 percent.

‘Positive Signal’

Early repayment of the loans is “a positive signal,” ECB council member Ewald Nowotny said last month.

Banks reduced borrowing in the ECB’s regular refinancing operations this week. Financial institutions took 124.1 billion euros for seven days and 3.7 billion euros for three months, down from the 125.3 billion euros and 6.2 billion euros, respectively, which matured.

“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.

The ECB provided the two tranches of so-called Longer Term Refinancing Operations a year ago after banks stopped lending to each other. Banks have the option of repaying the loans, which were offered at the average of the ECB’s benchmark rate over their duration, after a year.

Economists expected a total of 150 billion euros in early repayment for the first and 139 billion euros for the second tranche, according to a Bloomberg News survey. The first opportunity for banks to repay money from the second tranche, which amounted to 529 billion euros, is Feb. 27.

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