January 25, 2013 / 1:10 PM / 5 years ago

UPDATE 2-Banks to make big early payback of ECB crisis cash

* Total for first repayment surpasses expectations
    * 278 banks to repay three-year loans early
    * Analysts see limited impact on market rates
    * Risk of stigma returning to banks which don't repay

 (Adds analyst comment, market reaction, background)
    By Paul Carrel
    FRANKFURT, Jan 25 (Reuters) - Banks will repay more than 130
billion euros of crisis loans to the European Central Bank next
week, handing more cash back early than expected in a sign at
least parts of the financial system are returning to health.
    The ECB made over 1 trillion euros 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 euro zone's central bank said on Friday that 278 banks
would repay a total 137.2 billion euros ($183 billion) of the
December loans at the earliest opportunity on Jan. 30, 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, which exceeded the 100 billion
euros forecast in a Reuters poll of traders. 
Banks can repay the money early on a voluntary basis weekly from
now on. Repayment of the second LTRO starts on Feb. 27.  
    "This exceeded expectations, I expect the pace to slow down
considerably in the next week," said Nordea analyst Jan von
Gerich. "Quite a few stronger banks paid back as soon as
possible, whereas weaker banks took money in the second LTRO.
    "I don't think that repayments will reach a level where
overnight interest rates will start to move up," he added.
  
    The large early repayment will be welcome news to some ECB
policymakers, who were concerned about the increased risks the
central bank carried on its balance sheet with the loans.
    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 zone 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.
    Spanish and Italian banks were among those which ploughed
the money into their own countries' sovereign bonds, yields on
which were then at record highs but have since tumbled as a
result of the ECB's loans and its September bond-buying pledge. 
    They were seen as less likely to pay back the cash at the
earliest opportunity, preferring instead to keep holding bonds 
on which they are likely to have made big profits as the euro
zone crisis has eased. 
    
    STIGMA RISK
    Major banks who took the loans as an insurance policy are
most likely to repay early. Paying back is a badge of honour for
banks anxious to impress investors and rating agencies and
distance themselves from more cash-strapped rivals.
    Some, however, may risk overstretching themselves in their
eagerness to do this. There is also concern that early repayment
could highlight a two-tier system and see stigma returning to
banks who not choose early repayment, bankers said.
    "Circumstances have changed," said Chris Wheeler, analyst at
Mediobanca Securities. "Banks have shrunk their balance sheets,
and at the time they took the cash for many it was a
belt-and-braces approach to make sure they had a buffer in
place. Now they don't need it.
    "We possibly have a situation now where it's more of a
stigma than it was to be holding the money."
    Benoit Coeure, in charge of market operations on the ECB
Executive Board, sought to allay such concerns last Friday by
playing down the chance of banks repaying a massive chunk of
their LTRO cash this month. 
    Coeure also said excess liquidity in the euro zone remained
very high. Reuters calculations show there is around 583 billion
euros more money in the market than is required for it to
operate effectively.
    "It is important to keep in mind that there is still plenty
of excess liquidity out there," said Frank Oland Hansen,
economist at Danske Bank. "Short rates are going higher, but it
is still quite a moderate reaction."
         
($1 = 0.7477 euros)

 (Additional reporting by Eva Kuehnen and Sakari Suoninen in
Frankfurt and Steve Slater in London; Editing by Mike Peacock
and Catherine Evans)

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