The ECB has drastically lowered its standards for the collateral it accepts for these loans, so banks get to offload some very risky assets. The cash they’ll receive will generate a superficial improvement for banks — cash is considered the least risky asset to hold. But to move beyond a temporary solution banks have to lend the cash out in order to generate earnings. The cash itself would not earn enough interest to repay the 1 percent rate on the loans.
One of the most talked-about options for generating profits would be buying more European government bonds. European politicians and other advocates of this plan paint it as a win-win scenario. Banks generate earnings by purchasing higher yielding sovereign debt, such as Spain’s or Italy’s
So the ECB is accepting compromised collateral,
possibly at par, and may encourage the banks to buy even more compromised debt.
That’ll work! We flash back three years to the dark days of late 2008. The de-leveraging process still has a long way to go, and the can is
still being kicked down the road.
see also
AP:
banks snapped up €489 billion ($639 billion) in cheap loans from the European Central Bank on Wednesday, a sign of just how hard or expensive it has become to borrow from each other. The huge demand for newly available three-year loans comes as fears rise that heavily indebted European governments could default and force banks and other bond holders to take big losses…
The loans to 523 banks surpassed the €442 billion ($578 billion) in one-year loans extended in June 2009, when the global financial system was reeling from the collapse of the U.S. investment bank Lehman Brothers. It was the biggest ECB infusion of credit into the banking system in the 13-year history of the euro. The ECB wants banks to use the money to help pay off or refinance some €230 billion ($300 billion) in existing loans early in 2012…
it was far higher than the €300 billion ($392 billion) expected…”The good news is, the ECB’s efforts to increase liquidity are working,” said Jennifer Lee, an analyst at BMO Capital Markets. “The bad news is, high demand for the loans creates worries that banks are urgently in need of funds to boost liquidity.”
Let’s do some arithmetic. Much of the €489 billion
goes to refinance some €230 billion coming due next month. So there’s €259
billion of net additional liquidity spread among 523 banks. Not that much on a
per bank basis, but the largest amounts are no doubt concentrated in the
largest institutions.
Still, this is a drop in the bucket, compared to some estimates of the needs of the banking system, and it does nothing at all to
deal with the€2.6 trillion sovereign debt problem. Question: what happens when the debts begin
to mature and liquidity starts coming out of the system?
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