Banks take 201bn euros in weekly tender

FRANKFURT: Commercial banks took 201 billion euros in the European Central Bank's main 7-day refinancing operation on Tuesday, the highest volume since early February, in a sign of growing stress in the sector.

The Bank of China has stopped foreign exchange forwards and swaps trading with several European banks, evidence that euro zone debt troubles are spilling over into the banking system and raising the prospect of a repeat of the 2008 financial crisis.

The refinancing operation also followed Italy's surprise ratings downgrade by Standard and Poor's which fuelled fears of a deepening debt crisis.

Analysts said that the ECB data reflected the liquidity situation on the market as banks take precautionary steps to build up their cash supplies.

"Banks are accumulating some precautionary liquidity buffer because of current market situation," said Laurent Bilke, a strategist at Nomura.

"We don't think there is a generalised short-term liquidity problem. Long-term funding also seems ok so far. The question is how long will this last because the crisis weights."

ECB President Jean-Claude Trichet was quoted as saying on Tuesday that European banks should strengthen their balance sheets so they can withstand the crisis.

In the wake of Italy's downgrade the key euro-priced bank-to-bank lending rates edged up on Tuesday, by-passing high amounts of excess money market liquidity.

Borrowing from the ECB's so-called "emergency window" remained high, but edged down to 1.035 billion euros on Tuesday from 1.215 billion euros reported on Monday.

"We are not concerned," said one euro-zone-based trader who requested anonymity. "This should be resolved by tomorrow."

The ECB last week drained 143 billion euros in seven-day deposits at a weighted average interest rate of 1.01 percent.

The central bank charges borrowers 2.25 percent interest for the instant-access funds, compared to the 1.5 percent in its regular weekly refinancing operations, and the 1.041 percent overnight cash was on offer on open markets on Monday.

Copyright Reuters, 2011