(The following statement was released by the rating agency)
March 01 - Widespread participation in the European Central Bank’s second round of three-year refinancing is a further significant step in reducing refinancing risk. A continued improvement in market confidence towards banks means that access to wholesale funding should keep improving. The impact of Wednesday’s long-term refinancing operation (LTRO) on money flowing into the banks extends potentially way beyond the direct EUR530bn borrowed from the ECB.
The number of banks borrowing money from the ECB rose to 800 from 523 in December’s three-year LTRO. Additionally, the total amount borrowed this time was around EUR40bn higher than December’s EUR489bn.
This increase in the number of participants partly reflects loosened collateral rules, which allow banks to post certain corporate loans as collateral. These loans need to be individually assessed by the banks to determine relatively low default probabilities and processed through national central banks, which then determine an appropriate, and fairly substantial, haircut. Standards vary among national banks in how rigorous the internal loan rating process needs to be, as well as their view of an acceptable level of minimum loan quality.
The increase in participation may also reflect the lack of stigma attached to banks’ participation in the December LTRO, which is likely to have encouraged some banks to see the programme as simply a cheap source of three-year funds. Bank treasury managers would have considered that this was potentially their last opportunity to borrow three year funds at 1% and reacted accordingly.
It will be a few weeks before data becomes available from most national banks that will show us which countries accounted for what proportion of take-up. Even then, take-up by subsidiaries of banking groups primarily located elsewhere will distort the picture.
Fitch published a report Tuesday on the stabilising influence of the ECB programme. Please see related research to view the report.