By Geoffrey Smith
Investing.com -- Eurozone banks continued to run down their loans from the European Central Bank on Friday, extending a gradual reduction of the ECB's balance sheet, even as the Federal Reserve's spiked on the back of emergency intervention to support mid-size U.S. banks last week.
The ECB said that banks had chosen to repay another €87.73 billion (€1=$1.0625) from the third series of 'targeted long-term refinancing operations' - the last in a long line of measures aimed at easing monetary conditions in the decade that followed the euro crisis.
The so-called TLTROs had initially been offered at rates below the ECB's main refinancing rate in order to encourage lending to the real economy. However, the ECB decided to eliminate that discount last year as it started to tighten policy, given that it incentivized banks to hold excess reserves which kept downward pressure on market interest rates. It had also offered banks the opportunity to make large profits on a risk-free arbitrage, with banks parking some of the funds back at the ECB's deposit facility as it rose to 2%.
The amount repaid on Friday represents around 7% of the outstanding long-term ECB loans held by Eurozone banks.
The large repayment suggests that stress in the Eurozone money market is still at negligible levels despite the turmoil in the U.S. and in neighboring Switzerland this week.
Even so, other indicators of stress, notably interest rate futures and eurozone bank stocks, continue to tell a different story. Stocks weakened across the board on Friday, as efforts to bolster confidence in midsize U.S. banks again appeared to lose momentum. While markets had initially greeted news on Thursday of top-tier banks recycling some $30B back into First Republic Bank (NYSE: FRC ), by Friday the dominant sentiment was again fear that more drastic measures would be needed to restore confidence. First Republic stock fell over 21%, extending its fall as it resumed trading after a brief circuit break.
In Europe, Greek and Portuguese lenders were the biggest losers, with Piraeus Bank (OTC: BPIRY ) losing 4.4%, National Bank of Greece (OTC: NBGIF ) 3.6% and Banco Comercial (BS: BCPu ) stock down 3.5%. The region's biggest lenders - BNP Paribas (OTC: BNPQY ), ING (NYSE: ING ), Santander (BME: SAN ) and Deutsche Bank (ETR: DBKGn ) - were all down by between 1.8% and 3.2%.
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