UPDATE 2-Banks repay ECB crisis funds, toughen lending standards

Wed Jan 30, 2013 8:30am EST

* Less banks tightened credit standards in Q4 vs Q3
    * More banks expect further tightening in Q1
    * Mortgage demand expected to fall by quarter of banks
    * Banks repay some crisis funds early, no restocking in
sight


    By Eva Kuehnen and Sakari Suoninen
    FRANKFURT, Jan 30 (Reuters) - Banks began early repayment of
crisis funds to the European Central Bank on Wednesday,
shrinking the ECB's balance sheet while the world's other big
central banks are still spending to support their economies.
    Combined with lacklustre demand for weekly funding, it
helped boost the euro to its highest level against the dollar
since November 2011. 
    An ECB survey separately showed that banks' access to market
funding improved in recent months following the ECB's pledge to
do what it takes to preserve the euro and the launch of a new
bond purchase programme. 
    However, new capital requirements and financial regulation
led them to toughen loan standards.
    On Wednesday, banks returned about a quarter of the 489
billion euros they borrowed roughly a year ago in the first of
the ECB's twin three-year loan offerings in a sign that they are
less reliant on the crisis funds. 
    The unwinding of the ECB's crisis loans operations is in
stark contrast to the policies of the Bank of Japan, which
earlier this month doubled its inflation target to 2 percent and
made an open-ended commitment to buy assets from next year.
 
    In the United States, the Federal Reserve is expected to
keep asset buying at $85 billion a month when it ends a policy
meeting on Wednesday and to retain a commitment to hold interest
rates near zero until unemployment falls to 6.5 percent.
    But in Europe, ECB President Mario Draghi dashed hopes for
looser monetary policy by saying earlier this month "positive
contagion" from improved markets and stabilising economic
indicators would support a recovery later this year. 
    So far, this has not filtered through to the economy.
    Banks made it harder for firms and consumers to borrow in
the fourth quarter and expect to toughen loan requirements
further in the months ahead. Demand for loans also fell and is
expected to decreased further, which bodes ill for the recovery.
    "This illustrates the double credit whammy in the euro zone:
Tightening of credit conditions on the supply side and a fall in
demand, it's a squeeze on both sides," said Carsten Brzeski,
economist at ING. 
    "
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