Banks will return 10.651 billion euros ($14.48 billion) of crisis loans early to the European Central Bank next week, the ECB said on Friday, draining far more liquidity out of the system than expected. By repaying the ECB's crisis funds early, banks are reducing the level of excess liquidity - cash beyond what lenders need to cover their day-to-day operations - in the system further, from a current 158 billion euros.
The sum banks will return is the biggest early repayment since April. A Reuters poll of euro money market traders had expected them to return 2 billion euros next week. Short-term money market rates are seen rising closer to the ECB's main refinancing rate, now at 0.5 percent, once excess liquidity in the system falls below a threshold estimated to be in the range of 100 billion to 200 billion euros. The ECB is monitoring this development carefully as higher bank-to-bank borrowing costs could undermine the euro zone's fragile recovery. The ECB flooded the market with more than 1 trillion euros in two long-term refinancing operations (LTROs) in December 2011 and February 2012 to ease banks' funding strains.
The three-year loans from the ECB will mature in early 2015 and banks now have the option to repay them early. On Friday, the ECB said seven banks would repay 5.288 billion euros from the first LTRO on November 6, and five banks will pay back 5.363 million euros from the second LTRO.