Banks to begin repaying ECB's liquidity from Feb: Coeure

PARIS Thu Nov 15, 2012 2:22pm EST

PARIS (Reuters) - Banks may begin paying back long-term liquidity from the European Central Bank in large amounts starting in February, policymaker Benoit Coeure was quoted as saying on Thursday.

Aiming to avert a funding crunch, the ECB offered banks 1 trillion euros ($1.28 trillion) in three-year liquidity in two installments starting at the end of last year. They can begin to pay the money back early starting in February.

"I do not rule out that we may see strong repayments starting in February 2013," Coeure, a member of the ECB's executive board, told French business newspaper Les Echos.

"That would be good because it would be a sign of the normalization of bank financing conditions and decreased dependence on the ECB," he said, noting that such a move would help the ECB reduce the size of its balance sheet.

Funding conditions for banks have improved since the ECB pledged in July to do whatever it takes to preserve the euro and offered to resume purchases of bonds from governments that sought conditional help.

Coeure said the ECB stood ready to launch its bond buying program, dubbed Outright Monetary Transactions.

Euro zone pledges to entrust banking supervision to the ECB have also helped calm market concerns about the debt crisis, although governments are still struggling to agree on the scope of coverage and when it should be up and running.

"The single currency cannot function correctly if the banking sector remains fragmented," Coeure said, adding that unified oversight needed to be set up in 2013. "The credibility of the euro zone's reforms is at stake."

He also called on the European Commission to come forward with a proposal next year for a mechanism to wind down institutions that get into trouble.

Turning to the economic outlook for the euro zone, Coeure said that the 17-nation bloc would see a gradual recovery starting in 2013. "There is no reason to think that the recovery won't happen."

Data published earlier on Thursday showed that the euro zone's debt crisis had tipped the area into its second recession since 2009 in the third quarter despite modest growth in Germany and France.

(Reporting by Leigh Thomas and Daniel Flynn; Editing by Ruth Pitchford)