Eurozone banks’ ECB borrowing set to soar

Use of the European Central Bank's three-year funding programme is expected to exceed €500bn in February when lenders are offered their second chance to access its new long-term refinancing operation (LTRO), according to Credit Suisse.

Last month, banks borrowed a total of €489bn using the LTRO, which has effectively seen the ECB take on the role of providing a large part of the funding required by several eurozone banks.

Analysts at Credit Suisse point out the ECB's willingness to provide an increasing proportion of the short and longer-term funding required by eurozone banks has led to a widening gap in the size of its balance sheet versus those of the Bank of England and the US Federal Reserve.

The ECB's balance sheet has risen in size to close to 30pc of eurozone GDP from just over 20pc before it launched the LTRO. By comparison, the Bank and Fed's balance sheets are both worth just under 20pc of domestic GDP.

The willingness of the ECB to provide more funding to eurozone banks is in stark contrast to the Bank of England's much tougher approach to major UK lenders. For instance, while eurozone banks can easily put up covered bonds as collateral against ECB loans, the Bank specifies what collateral is acceptable for each of its funding programmes and applies tighter criteria against their use.

While eurozone banks are allowed to issue covered bonds specifically for use as collateral to access ECB funding the Bank prohibits such behaviour. The disparity has led to what Credit Suisse describes as an "uneven playing field" between UK and eurozone banks.

Last week, the Bank's policy came in for criticism from the City. A report by UBS analysts claimed the Bank's actions meant British lenders were having to pay more to issue debt than their Continental rivals. UBS said the Bank's refusal to contemplate providing UK lenders with easier access to liquidity support risked creating problems.

Bank officials have been clear they do not think UK lenders require any new assistance and should not have access to cheaper funds.

Some British lenders, such as Barclays and HSBC, which operate major eurozone banking operations, should have access to the ECB funding programmes should they choose to use them.

The ECB's decision to increase its exposure to banks has effectively seen it provide the "bazooka" markets had been urging it to use to help stem the debt crisis.

Spanish banks that borrowed money using the LTRO are thought to have used most of it to buy Spanish government debt, leading to a lowering in yields.

The Telegraph