Eurozone bank demand for European Central Bank loans remained high on Tuesday and was expected to stay strong at upcoming emergency tenders as banks build up cash buffers, fearing there will be no quick solution to the debt crisis. While risk assets rallied on hopes EU officials were working to stem the crisis, with European bank shares leading regional equities higher, there were few signs of marked improvement in most interbank strain indicators.
Key euro-priced interbank lending costs rose despite the cash surplus in the system, with the liquidity-dependent overnight rate fixing higher above 1 percent. Commercial banks took up 208 billion euros of funds at the ECB's weekly tender, slightly higher than the 201 billion they took up last week, which was the highest volume since February.
Given that the most acute problems for banks are in accessing term funding, some analysts had expected lower demand at the seven-day tender ahead of the ECB's offer of three-month loans on Wednesday. Banks were still expected to take up some 135 billion euros, similar to the amount expiring, according to a Reuters poll of money market traders.
Most of the cash being taken up is getting parked right back at the ECB where they pay a penalty for using the overnight deposit facility, showing banks' reluctance to lend it on. They deposited 165 billion euros overnight compared with 150.6 billion the previous day, ECB data showed.
"There's no trust among banks. What we're seeing in the last two days, the improvement in markets' mood is a temporary relief from the pronouncement from policymakers," said Giuseppe Maraffino, a strategist at Barclays Capital. "But we need to have concrete measures to have a structural improvement in confidence among banks in order to have normalisation in money markets," he added.
Maraffino and some money market traders said they expected the aggressive bidding for overnight funds to continue in coming days, keeping overnight Eonia near or above 1 percent. Shorter-term one-week euro-priced interbank rates - most heavily influenced by excess liquidity levels - rose to 1.211 percent from 1.195 percent. Dollar funding costs also nudged higher, with three-month dollar Libor edging up to 0.36522 percent from 0.36278 percent on Monday.
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