Last week the European Central Bank (ECB) provided a second round of cheap loans to European banks. This follows on from the first tranche of similar loans offered in December 2011. Although these loans have provided some stability to the European banking system it is unclear if they cultivate a long term, sustainable banking culture.
Following on from last December’s loans of €489bn, the ECB released a further €530bn of low interest loans to hundreds of European banks on 29th February. With a low interest rate of 1% it is hoped the move will help to avert a possible credit crunch and ensure enough liquidity is pumping through Europe’s financial system.
Thus far, the majority of funds have been taken up by Italian and Spanish banks to shore up funding gaps and buy government bonds. For these banks and countries such short term measures are vital if they wish to avoid going down a similar route to Greece; however, there is still an issue with the loans not being utilised to increase lending among banks, which is fundamental to avoiding a credit crisis. There are varying views as to whether the ECB loans are positive and beneficial.
The take up is not solely focussed on struggling EU countries. A number of banks in the UK, including Barclays and Lloyds Banking Group have drawn loans from the ECB; €8.2bn and €11.4bn, respectively. Although the ECB does not release the identity of those taking up the loans, other large banks in Europe, such as Commerzbank and Deutsche Bank in Germany, and Societe Generale in France, have seen shares rising on the markets, indicating that they may have accessed the loans.
There are those who have refused to take advantage of the cheap loans provided by the ECB. Nordic banks such as Sweden’s Nordea and Swebank, which qualify for the loans due to their branches in eurozone states, such as Estonia and Finland, said they would not take up the loans due to the “stigma” of a bank in need of help. There are also high profile critics of the scheme. President of the Bundesbank and Angela Merkel’s former adviser Jens Weidmann has warned that the ECB risks “loss of reputation” in its increasing provision of liquidity to weaker European banks. Weidmann is also concerned that the conditions attached to new ECB loans are not strict enough.L
Access to the loans is also limited for some countries. Greek banks are unable to draw on the loans due to Standard & Poor’s downgrading of the country to selective default, which technically prohibits the ECB to take on Greek bonds as collateral for loans. Although Greece is benefitting from other sources of financial support these low interest loans may have been useful for them in the short term.
Although the loans do provide short term relief for European banks, allowing them to purchase bonds and make up for funding gaps, long term plans to restructure banks are also required. The ECB has dramatically increased its balance sheet with this new tranche of loans and national central banks may also be exposed to future, substantial losses should any banking defaults occur.
The liability issue is also a concern. These loans are effectively a subsidy from eurozone taxpayers, who have already paid heavily to prevent banks throughout Europe from collapsing. Taxpayers and countries will not be able to continually and sustainably perform this role and it is now vital that, with EU support, banks begin the process of lend to one another again. Simply drawing the loans and storing them like squirrels do with acorns is not going to get Europe growing again.