European Central Bank (ECB) lending to Irish financial institutions was €44.1 billion in July as banks used the central bank's lending facility to shore up liquidity. It was the highest level since the credit crisis began in August 2007.
This ECB funding, which includes borrowing by international banks in the IFSC in Dublin, fell to €28.2 billion in February, but it has been rising since May, as inter-bank funding costs have remained high.
Last week, the UK's largest building society, Nationwide, said that it was planning to expand into Ireland to take advantage of "funding opportunities".
The building society will be able to access ECB funding by taking savings in euro from customers and establishing an operation in the Eurozone.
The disclosure of the heavy reliance of the Irish institutions on the ECB facility coincides with reports that the central bank is understood to be preparing to refine its rules on the kinds of collateral allowed under its liquidity-providing repurchase operations for banks.
The ECB may adjust the collateral rules as early as Sept. 4th, when ECB President Jean-Claude Trichet holds a monthly press conference on policy decisions following a meeting of the Governing Council.
Since the onset of the credit crisis, the ECB and other major central banks a year ago began offering temporary funds to banks through special repurchase operations.
The ECB currently provides about €451 billion liquidity through its main and long-term repos. Banks can also have access to the ECB’s marginal lending facility for overnight cash at a 5.25% penalty rate. But there are worries that banks have become over-reliant on ECB funding, or may be abusing the facilities.
There are fears that some financial institutions may have started to treat the ECB’s financing window as a substitute for a well-functioning structured finance market that has been largely shut since last August.
ECB Governing Council member and head of the Dutch central bank Nout Wellink warned last Thursday that banks risk becoming overly dependent on ECB funding, instead of the inter-bank credit market. He suggested the ECB might have to prompt banks to find other sources of funding, but offered no specifics.
Yves Mersch, Luxembourg’s central bank governor, said at the US Federal Reserve economics symposium in Wyoming at the weekend that a “certain amount” of refinement to the ECB’s rules had been agreed. "At the margins there can still be cases where you see dangers of gaming the system," said Mersch.
If the ECB tightened rules on eligible collateral, it may have an adverse impact on economic activity.
A Financial Times/Harris Interactive poll published today shows that only 5 per cent of the Spanish and 8 per cent of Germans were prepared to say the ECB had responded appropriately to deteriorating economic conditions, with 56 and 48 per cent disagreeing. Spanish discontent could reflect the fact the ECB has raised its main interest rate over the past year, in spite of the abrupt slowdown in Spain’s economy and the financial pressures facing many homeowners.
The FT says German dismay is harder to explain, especially as the ECB won praise in financial markets for its early and bold injections of emergency liquidity at the start of the crisis.
Another surprising result is that in France – where political criticism of the ECB has been loudest – the Frankfurt institution appears to enjoy slightly better public support than in Germany, Spain or Italy. In the US, the Federal Reserve also fared worse than the Bank of England.
Poll details from Harris Interactive
