Repayment of crisis loans shows system on the mend

President of the European Central Bank, Mario Draghi. Picture: AP
President of the European Central Bank, Mario Draghi. Picture: AP
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Banks will repay more than €130 billion (£111bn) of crisis loans to the European Central Bank (ECB) next week, handing more cash back earlier than expected in a sign at least parts of the financial system are returning to health.

The ECB made more than €1 trillion of ultra-cheap three-year loans to banks in twin lending operations in December 2011 and February 2012 – a move ECB president Mario Draghi said had “avoided a major, major credit crunch”.

The eurozone’s central bank said yesterday that 278 banks would repay a total €137.2bn of the December loans at the
earliest opportunity on 30 January, although it did not name them.

A total of 523 banks tapped the first of the two long-term loans, known as LTROs, just over a year ago.

German debt prices fell and banking stocks and the euro rose on news of the early repayment.

“This exceeded expectations, I expect the pace to slow down considerably in the next week,” said Nordea analyst Jan von Gerich. “I don’t think that repayments will reach a level where overnight interest rates will start to move up.”

German chancellor Angela Merkel said at the World Economic Forum in Davos, Switzerland on Thursday: “It will be important for Europe as well that the ample liquidity that was given out to banks last year is collected back again.

Banks generally borrowed cash for three reasons: as an insurance policy in case the euro crisis worsened and left them short of liquidity; as a “carry trade” to finance purchases of higher yielding government bonds; or to fund their loan books if they were struggling to access cheap funding.

Major banks which took the loans as an insurance policy are most likely to repay early.