European Banking Sector Liquidity Better Than Feared

By: Dr. Mike Campbell

As we reported yesterday, the markets were having yet another bad case of nerves over liquidity measures as one year loans from the European Central Bank (ECB) fell due and the organisation had indicated that it would no longer offer these exceptional twelve month duration vehicles. The ECB had extended €420 billion in loans during the financial crisis last year and the market was concerned that European banks may be starved of access to new funding – which would have precipitated anther major crisis. In the event, the demand for new ECB funding was much lower than the €200 billion that some analysts had predicted. The figure for renewed borrowing (with a three month term to maturity) was €131.9 billion. The news pushed European stocks a little higher and the Euro strengthened by one cent against the pound Sterling.

As a measure to help build confidence within the financial sector for investors, the ECB is to extend its “stress tests” to more banks. The tests are designed to provide a simulation of how well the institutions would fare if there was another major financial crisis. The stress tests have been augmented to determine how the banks would fare in the event that the sovereign debt crisis actually caused a Eurozone member to default on their obligations. The tests (which are mandatory) may now be extended to up to another 120 banks. The results from this latest wave of testing, described as “rigorous and credible” by a spokesman for EU Commissioner Barnier, will be published on a bank-by-bank basis later this month.