RPT-Fitch: German Bank Excess Liquidity Reduces as LTRO Falls

Tue May 20, 2014 9:11am EDT

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May 20 (Reuters) - (The following statement was released by the rating agency)

Excess liquidity at German banks is contracting as repayments by eurozone banks reduce the ECB's long-term refinancing operation (LTRO), Fitch Ratings says. This is contributing to the return of more normal bank funding conditions.

There was an over-supply of liquidity to stronger northern European banks, particularly in Germany, from the domestic and cross-border interbank market and from institutional investors following the onset of the eurozone crisis. The "flight to quality" probably had more to do with the strength of the sovereign than the individual banks. It also related to the very high level of deposit insurance at German banks, which covers up to 30% of the bank's equity per customer, protecting a large proportion of institutional deposits. Excess liquidity meant the banks were substantial depositors with the ECB during much of the LTRO period.

This meant LTRO take-up in Germany was low compared with other eurozone countries. Peak LTRO use by German banks was only EUR73bn in March 2012, compared with EUR169bn in France, EUR315bn in Spain and EUR268bn in Italy. The German banks mostly used it opportunistically as a cheap source of funding to replace short-term interbank or medium-term wholesale sources. Only EUR11bn of German bank LTRO funds was outstanding at end-February 2014, the most recent available data.

Overall, more than half the total LTRO scheme has been repaid with less than a year to go before maturity of the facilities. Repayments relative to use have been higher from northern European banks. Nevertheless, peripheral banks have also repaid large amounts, partly reflecting improved wholesale funding conditions.

The spike in German banks' use of the ECB's main refinancing operations (MRO) around end-2013 may signal a return to more normal funding conditions after two years of surplus liquidity. German banks' use of MRO rose to EUR38bn at end-2013, up from EUR2.9bn at end-2012. It suggests that they are tapping the MRO as they would have done before the eurozone crisis as excess liquidity falls.

For an analysis of banks' LTRO usage and repayments, ECB deposits and lending, see our report "ECB's Long-Term Refinancing Operations (LTROs) - Successfully Provided Stable Funding but Failed to Boost Lending; Repayment Trends Vary", published 30 April 2014 and on www.fitchratings.com.

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