FRANKFURT (MNI) – Liquidity conditions in the European interbank
market continued to decline over the last year as banks cut back on the
amount they borrowed and loaned to each other by an aggregate of 14% and
increased their preference for short term lending compared to last year,
data released by the European Central Bank show.
The ECB’s annual Euro Money Market Survey, which compares data from
the second quarter of the current year with the data from the same time
period a year earlier, shows that banks’ borrowings decreased 38% while
their lending to each other fell 31%.
As much as 83% of lending between European banks was overnight, an
increase of four percentage points. The proportion of overnight
borrowing, however, fell to 66% compared to 73% last year.
Secured lending remained the preference, and banks increased their
use of central counterparties, decreasing their direct exposure to each
other.
The Euro Money Market Survey also revealed a 50% fall in banks’ use
of overnight index swaps and a 16% fall in the use of other interest
rate swaps. Use of foreign exchange derivatives, by contrast, increased.
Banks responding to the survey generally indicated that liquidity
conditions had deteriorated in all segments of the market. Respondents
also judged that the efficiency of the unsecured market had eroded
markedly since 2011 but that the secured lending market and other market
segments had improved.
The deterioration in the interbank market comes despite the best
efforts of the ECB to inject life into the system, including E1 trillion
of cheap three-year loans to Eurozone banks in longer-term refinancing
operations conducted at the end of 2011 and in early 2012.
The results of the survey also suggest that policymakers’ efforts
to restore confidence in the banking system by imposing stress tests and
higher capital reserve requirements have yet to bear fruit.
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