Interbank euro lending rates dipped on Friday as abundant European Central Bank liquidity limited upward pressure and there were signs that alternative avenues of funding were also opening up to banks. The euro commercial paper market - made up of short-dated corporate and financial-sector bills - expanded in August according to Commerzbank as issuance conditions improved while interdealer broker ICAP said repo volumes had increased.
Markets remained segmented with lower-credit banks in the eurozone periphery largely sidelined and reliant on ECB funding, analysts said. With no prospect of the ECB withdrawing access to unlimited funds before 2011, benchmark three-month euro Libor dipped to 0.82344 percent, and the equivalent Euribor rate edged down to 0.878 percent - its lowest since mid-July.
The euro-denominated commercial paper market expanded by around $18 billion in August led by the banking sector, Commerzbank said, with some euro zone banks able to edge away from European Central Bank loans into alternative sources of funding. "If you're a relatively good credit, you've done your homework and you've got interesting coupons to offer then I think you can do well," said Kenneth Broux, economist at Lloyds TSB in London.
Commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days that can also be traded, a different form of borrowing to the single bank-to-bank lending which Libor and other similar rates track. Dollar-denominated commercial paper has proved popular with issuance of longer-denominated paper increasing noticeably. "In part, this can be attributed to good bank names being able to attract the interest of US money market funds searching for pickup in a low yield environment," said Benjamin Schroeder, strategist at Commerzbank.
Although the ECB recently halted its withdrawal of the extra support it has given interbank markets since the collapse of Lehman Brothers in 2008, slowly easing money market conditions have allowed some institutions to reduce their dependency. The amount of fixed-rate ECB loans in the banking system has fallen to just under 600 bilion euros from a peak of over 900 billion euros in July. In addition to the expansion of commercial paper markets, improved repo market volumes show banks are tapping alternative sources of funding.