ECB's LTRO means more holding of funds and less lending
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ECB's LTRO means more holding of funds and less lending

The terms and longer duration of the LTRO have the potential to seriously interfere with the European debt capital markets, says lawyer

Euromoney has stressed that the European Central Bank's (ECB) long-term refinancing operations (LTRO) should be used as emergencies only and not as replacement for the European bank funding market.

After more than 800 banks borrowed over €500 billion of three-year funding at a rate of 1%, market experts have waded in with concerns over the long-term consequences, rather than an immediate sigh of relief that the LTRO will greatly reduce the refinancing risk in the banking sector.

Speaking to Euromoney, Scott Cameron, partner at global law firm Reed Smith, says:

"... the ECB's actions have reduced any incentive for the banks to issue any senior unsecured bonds for the foreseeable future. As the banks make up almost 50% of the corporate bond market, it is not difficult to see how this will cause the market to contract significantly over the next three years.

"The negative impact on the ECB’s longer-term liquidity operations on the size of the corporate bond market means less choice for institutional investors needing to invest excess cash.

"This could nevertheless prove beneficial if the end result was to see the banks increase their lending activity. Instead, it appears from the record amount of deposits at the ECB (in excess of €800 billion) that rather than lending, the banks are merely holding the funds to ensure maturing long-term debt over the next three years can be repaid."

For more in-depth LTRO coverage, check out the following stories:

€529 billion LTRO 2 tapped by record 800 banks

Three-year ECB loans should be for emergencies only. They should not become a replacement for Europe’s bank funding market

Click here for the full story

Intesa returns to LTRO funding

Peripheral banks prefer to fund cheaply from the ECB rather than expensively from the market, even though investors might take fright

Click here for the full story

LTRO 2: ECB boosts equities, hopes for weak euro

Most market strategists suggest that the ECB must pause and assess the effectiveness of the extraordinary measures it has taken

Click here for the full story

And ...

Distressed corporate debt: The end of extend and pretend
Refinancing options are running out for many European companies with looming debt maturities. Could the banks’ own funding problems finally precipitate the distressed debt opportunity this market has been waiting for? Or are the consequences of asset disposals too brutal for many banks to take?
Euromoney February 2012

LTRO2: No bank safety in Draghi's massive numbers
Bankers predict the next round of ECB financing could top €1 trillion. But it will take more than an LTRO-induced liquidity injection to fix Europe’s banks
Published January 2012

ECB: Two cheers for the three-year LTRO 
Will Europe’s leaders do enough to convince banks to finance its problem sovereigns through an ECB-led carry trade?
Euromoney January 2012

Funding: A Talf for Europe
ECB lets banks delever in orderly fashion; bank bond issues might be scarce this year
Euromoney January 2012

Global finance: Running on empty 
“The LTRO is a lot more positive than we’d originally expected"
Euromoney January 2012

“Monumental” uptake of ECB LTRO but carry-trade impact unlikely
The €489.2 billion take-up of the ECB’s inaugural three-year LTRO on Wednesday underscores the significance of this new facility to the bank funding market in Europe
December 2011

ECB's new LTRO threatens the covered bond market .
Banks may opt for cheaper long-term LTRO funding rather than secured issuance next year
December 2011

Funding freeze pushes banks closer to the edge
The ECB announced two new LTROs in October – one for 371 days and one for 406 days. Total borrowing at the October 26 auction was €101.5 billion, with 181 bidders for the 12-month LTRO (far lower than the 1,121 that bid in the June 2009 LTRO). But for how long can the ECB substitute itself for the interbank lending market?
Euromoney November 2011

Banks can't dodge the EU sovereign debt crisis
Euromoney March 2010 

ECB offers longer-term finance via six-month LTROs 
Euromoney May 2008 

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