The eurozone banking system has shown signs it can wean itself off the ECB's life support loans but while interbank rates are volatile and funding for weaker banks troublesome, money market 'normality' is a long way off.
Demand for the European Central Bank's unlimited fixed-rate loans - designed to keep banks lending to each other in stressed markets - has fallen, pushing bank-to-bank lending rates back to levels seen before the 2008 financial crisis brought money market activity shuddering to a halt.
The value of the ECB's lending to banks shrank to 450 billion euros in January, its lowest since October 2008 and down from a peak of over 900 billion euros in June 2010. "The fact that liquidity is going down week after week is certainly an encouraging sign but it doesn't tell you the full picture," said Unicredit rate strategist Luca Cazzulani.
Competition for a smaller surplus of liquidity and large weekly swings in ECB borrowing have seen the cost of overnight borrowing surge and the path of rates become volatile.
Throughout January's ECB maintenance period - the timeframe over which banks are required to keep a set amount of cash at the central bank - the overnight Eonia rate varied by almost a full percentage point, between 0.347 percent and 1.318 percent. By comparison, in the first three months of 2007, Eonia moved an average of 12 basis points over the course of a reserve period.
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