There is no doubt that the ECBs December three-year long-term refinancing operation (LTRO) auction was the key factor in taking the likelihood of a liquidity-driven bank funding crisis off the table in Europe.
It did the job spectacularly, tricking the markets back into life, and a surge of issuance in January followed.
It is, however, interesting to consider what might have happened if the central bank had announced just one three-year auction rather than two.
How much of the market activity that followed the December auction was driven by banks assembling collateral for the February one? Probably a fair amount particularly given the string of tender offers that have taken place in eligible collateral in the interim.
According to research published by SocGén, just a handful of banks Barclays, Credit Suisse, Deutsche Bank, Natixis, SEB, SHB and UBS stated their intention not to take up the ECBs cash at its second February auction.
Indeed, several banks that shunned the first three-year LTRO auction in December planned to get in on the action second time around.
At a recent results announcement, Lloyds chief executive António Horta-Osório said: It might make sense for us to access the LTRO.
RBS finance director Bruce van Saun has been quoted in the Financial Times as saying that the LTRO offers relatively cheap money and there is very little stigma around taking it. RBS tapped the first LTRO auction in December for 5 billion.
Indeed, many weighed up the pros and cons versus the other forms of funding available to them before deciding whether to participate. BNP Paribas commented that the new categories of collateral are associated with very big haircuts, so that maybe they can be used better in the covered bond markets we have a very fine-tuned assessment of the optimization of all this.
These dont sound like banks that have no recourse to the market and are using the LTRO as an emergency last resort. They sound like banks that have recognized a very cheap source of funding and want some of it for themselves.
The second LTRO auction on February 29 saw 800 banks take part versus the 523 banks that took part in the first auction on December 21. That is an awful lot of banks not all of which cannot access the funding markets reasonably comfortably on their own. The ECB allotted 529.5bn to LTRO2, slightly higher than the 489 billion allotted in December but way off the 1 trillion figure that was being speculated upon earlier in the month. Net new borrowing under the February auction was around 313 billion - out of a total of 256bn existing ECB lending 215bn was rolled into LTRO2.
There is, however, little sign that these three-year funds are having much impact on the real economy. Yes, peripheral banks have increased their purchases of government bonds considerably, successfully easing the sovereign funding crisis that was brewing at the end of last year. Since the first LTRO the Italian 10 year has moved from a yield of 6.75% to 5.34%%. The Spanish equivalent has moved from 5.6% to 5.02%
However, according to SocGén, a larger number of banks planned to use their LTRO 2 cash for debt repayments only. Indeed, several have funded their entire requirement for 2012 and beyond via this source. This might be good news for their shareholders, but is this the best use of ECB funding at this point? So much for the transmission of credit to the real economy.
One three-year LTRO was essential and necessary to avert a banking crisis and give banks the opportunity to buy themselves some time. Two LTROs is starting to look a bit like subsidization of the banking sector.
There have even been mutterings in the market that the ECB will need to announce a further three-year auction in September. That just looks greedy.
Indeed, ECB executive board member Joerg Asmussen has been quoted in Handelsblatt as saying that the central bank cannot commit to offering more three-year cash to euro-area banks after the February auction.
There will be no shortage of demands on the ECBs balance sheet in the months to come, so the regions banks need to readjust themselves to the realities of their market and get on with delevering themselves and right-sizing their balance sheets without unlimited cheap funding to defer the inevitable.