Extra Cash In The European Banking System Has Reached Critically Low Levels
Banks will return 1.558 billion euros ($2.14 billion) to the ECB on April 2, a lot less than this week's repayments of 18.909 billion euros and also far below the 9 billion forecast in a Reuters poll.
Over the past three weeks, banks repaid in total around 40 billion euros, driven in part by the expiry of some of the sovereign bonds that they had bought with the cheap money. Lenders have also been shaping up their balance sheets for the review the ECB is making of their assets before it takes over banking supervision.
This meant that excess liquidity - the amount of money banks have beyond what they need for their day-to-day operations - fell to 104 billion euros on Friday, the lowest since late 2011.
It peaked in early 2012 at around 800 billion euros.
Overnight bank-to-bank borrowing costs are expected to move up once excess liquidity drops below a certain level, seen between 80 billion and 100 billion euros.
"It becomes a situation now, where the level of excess liquidity will have an effect on EONIA and this is a reason for banks to repay less," said a money market trader who asked not to be named.
The main gauge of overnight money market costs, EONIA stood at 0.171 percent on Wednesday compared with 0.169 percent earlier this week.
"We expect EONIA to rise to around 0.20 percent next week," the trader said.
This development makes it more expensive for banks to get overnight funding and more attractive for them to hold on to the cheap long-term ECB loans.
The ECB lent banks more than one trillion euros in three-year loans during the euro zone's debt crisis, in December 2011 and February 2012, to help lenders ride out funding constraints.
Since January of last year, banks have repaid more than half of those loans.
On Friday, the ECB said three banks would repay 175.2 million euros from the first LTRO on April 2, and five banks would pay back 1.383 billion from the second LTRO.
(Reporting by Frankfurt newsroom; Editing by Ruth Pitchford)