Bloomberg News

ECB Loan Deal May Release $12.8 Trillion Cash, Citigroup Says

January 16, 2012

Jan. 13 (Bloomberg) -- The European Central Bank’s easing of rules governing collateral may release enough assets to allow banks to borrow more than 10 trillion euros ($12.8 trillion), according to analysts at Citigroup Inc.

The ECB said last month it will allow banks to use performing “credit claims,” such as bank loans, as collateral when borrowing from the central bank. There are more than 11 trillion euros of performing loans in the euro area, Citigroup’s London-based analysts led by Ronit Ghose and Kinner Lakhani wrote in a note.

“Central banks will create as much liquidity as needed to backstop the European banking system,” the analysts wrote. “Banks will not run out of cash or collateral.”

Concern that Europe’s sovereign debt crisis may bring down banks triggered a surge in demand for collateral to use in secured borrowing, helping push yields on Germany’s one-year notes below zero at the end of November. A gauge of the premium lenders demand to accept notes posted as collateral has fallen to 19 basis points from 137 basis points six months ago, as unsecured borrowing evaporates.

The details of the new rules should be agreed at a meeting of the ECB on Jan. 26, the analysts wrote in the note dated yesterday.

The easing of collateral rules is “perhaps as significant” as the ECB’s decision to allow banks to borrow unlimited amounts for as long as three years, according to the analysts. A total of 523 banks borrowed 489 billion euros last month in the first of two planned tenders, which translates to an inflow of 209 billion euros of new cash entering the economy net of outflows, according to the analysts.

Italian banks borrowed 110 billion euros at the December refinancing operation while their Spanish peers borrowed 80 billion euros, between them accounting for about 40 percent of the total allotted, according to Citigroup.

--Editors: Michael Shanahan, Andrew Reierson

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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