June 26, 2012 / 12:18 PM / in 6 years

Euro market lockdown feeds bank dependence on ECB

FRANKFURT (Reuters) - Banks’ demand for European Central Bank funding surged on Tuesday to 180 billion euros, well above expectations, more than four times the demand just a month ago and the latest evidence of a growing crisis-driven dependence on ECB funding.

The euro zone’s problems have choked off bank-to-bank lending. Only the safest banks in core parts of the bloc are still able to borrow on the open markets, leaving those in Spain, Italy and other countries with outsized debt burdens increasingly reliant on the ECB for their funding.

A total of 180 billion euros ($225 billion) was taken by 105 banks at the ECB’s weekly handout of limit-free, 1 percent, 7-day loans.

It was higher than the 167 billion euros 101 banks borrowed a week ago, well above the 169 billion expected to be taken and far exceeded the 38 billion euros that 84 banks took at the equivalent operation a month ago.

Although banks may temper their appetite for 3-month ECB loans available on Wednesday, their soaring demand for its funding is likely to be a source of serious concern for the ECB.

The central bank has pumped over a trillion euros of 3-year cash into the banking system since the end of December, a move it could have expected to satisfy banks’ needs comfortably.

It is now lending banks double what it was just six months ago. Reuters calculations show 737 billion euros of excess cash in the euro zone banking system. However, crisis tensions are prompting banks to hoard the money rather than lend it on. Over 750 billion was parked back at the ECB overnight.

(Reporting by Marc Jones; Editing by Ruth Pitchford)

This story has been corrected in the fourth paragraph to fix last week's figure to 167 billion from 132 billion

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