The European Central Bank said on Friday payments from crisis loans it had lent to banks had been reduced to EUR3.59 billion or USD4.8 billion total. However, the central bank of Europe insisted that banks should pay their loans next week.
Moreover, the recent interest rate cut had made the funds more attractive to keep, Reuters said in its report. ECB had reduced the rate of its main refinancing to 0.25%, which is a record low. The reduction of the rate automatically reduced the interest rate of European banks' three-year loans.
On the other hand, the repayments ECB insisted on banks had fallen short of Reuters poll estimates. Majority of euro money market traders expected the banks to return EUR4 billion in repayments.
On the bright side, Reuters said repaying the crisis funds back to ECB by banks would reduce the excess liquidity levels of banks in the financial system from EUR169 billion at the moment. Excess liquidity means the cash beyond what the lenders need in order to cover their operations on a daily basis. rates on short-term money markets were observed to be climbing closer to the main refinancing rate of the ECB. This would be seen once excess liquidity would fall below the EUR100 billion to EUR200 billion threshold. ECB has been noted to monitor this development as higher costs on bank-to-bank borrowing could undermine the fragile recovery of Europe.
Last week, ECB extended the timeframe in which banks would be granted their request to acquire cash in liquidity operations until July 2015. ECB would also be leaving the door open for further cuts in rates and other financial measures. According to Reuters, eight of the 14 banks had said ECB would be doing so in the early part of next year. One of the 14 said it might be earlier than that, and four of the banks said it might occur later in 2014.
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