UPDATE 1-Loan repayments surge, put pressure on ECB

Fri Dec 13, 2013 7:47am EST

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* Bank repayments to ECB rise to 22.65 bln euros
    * Will put pressure on money-market rates, ECB
    * Immediate central bank action unlikely
    * Year-end, bank tests seen as reason behind high amount

 (Adds detail, strategist comment)
    FRANKFURT, Dec 13 (Reuters) - Banks will return a massive
22.65 billion euros ($31.15 billion) of crisis loans early to
the European Central Bank next week, the ECB said on Friday,
putting pressure on money-market rates and on the ECB to ease
its policy.
    The amount is the highest weekly repayment since February,
when banks had the first chance to pay back funds from the
second 3-year loan. It will result in less money sloshing in the
system, as banks are getting get into shape for an upcoming
balance sheet review.
    Banks took more than 1 trillion euros from the ECB in 3-year
loans from the ECB in late 2011 and early 2012. The pace at
which banks are voluntarily returning the loans early has picked
up over recent weeks. The loans mature in early 2015.
    The repayments will lead to a decline in excess liquidity -
the amount of money in the market beyond what banks need for
their day-to-day operations. It is now at 163 billion euros
 and will fall further, to levels where the
repayments put stronger upward pressure on short-term money
market rates.
    Higher short-term rates are not going to delight the ECB,
which cut rates in November to aid the ailing economy, and
increases pressure on it to counteract the development. However,
analysts said that it is unlikely to react immediately.
    "In the very near term, I don't really think that the ECB
will do something," Barclays rate strategist Laurent Fransolet
said. "The bigger question really is how much further do you go
down. Our view is that certainly by middle of 2014 you are below
100 billion."
    
    CLEANING UP
    The repayments were almost four times the expected amount in
a Reuters poll of money market traders - they had expected 6.0
billion euros to be returned to the central bank.
    The ECB will take a thorough look at the euro zone's top
lenders' books before it takes up responsibility as their
supervisor from November next year. 
    ECB President Mario Draghi has lamented the fact that banks
used much of the money to buy government bonds instead of
lending it to the real economy, and said that any new long-term
loans would increase lending to the private sector.
    Executive Board member Peter Praet said on Thursday that the
ECB could offer lenders more liquidity if the bank tests crimped
their lending.
    Banks have already started to tidy up their balance sheets
in anticipation of such tests, in addition to regular year-end
clean-up.
    "As you go toward the end of the year, everyone is always
looking their best," Fransolet said, and added that LTRO funds
are also becoming less attractive as their residual maturity
drops below 1 year soon, meaning their treatment in maturity
profile will change.  
    On Friday, the ECB said seven banks would repay 3.32 billion
euros from the first LTRO on Dec. 18, and nine banks will pay
back 19.33 billion euros from the second LTRO.
    After these repayments, banks have one more chance to repay
loans this year, before a year-end break. Repayment
announcements will resume on Jan. 10.
        
    ($1 = 0.7271 euros)

 (Reporting by Frankfurt newsroom; Editing by Larry King)
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