* Eonia volumes drop year-on-year in January
* Partly caused by dropouts from rate-setting panel
* Banks also allocating more funds for longer-term lending
By Marius Zaharia
LONDON, Feb 4 Euro zone overnight bank-to-bank
loan volumes shrank sharply year-on-year in January, partly
reflecting signs of healing in the financial system as banks
become more confident about lending longer-term.
Improved longer-term access to funds in money markets is a
crucial pre-condition for banks to lend more money to businesses
and help the region's economy recover.
Reuters data on settlements of the euro overnight Eonia rate
showed the daily average volume of trades dropped to
17.37 billion euros in January 2013 from 30.47 billion in the
same month of last year.
Withdrawals from the rate-setting panel, including
heavyweights Citi and Rabobank, in the wake of a
scandal over setting interbank interest rates, contributed
significantly to the drop in volumes, but are unlikely to have
accounted for the entire sum, traders said.
Better economic data in the euro zone and the United States
and expectations the European Central Bank would step into
government bond markets if the three-year-old debt crisis
escalated are encouraging banks to take more risk.
That is shifting some of the money from low-risk overnight
trades to longer-term maturities.
"The situation is improving from a curve extension point of
view and the quality of names being lent to is also decreasing,"
one money market trader said.
"I've (even) seen one-year trades going through, but (most
of the activity) is in the three-month and six-month sectors and
volumes are picking up."
Another sign of improved confidence in money markets could
be that banks repaid a higher than expected amount in three-year
loans (LTROs) taken from the ECB late in 2011, when the central
bank offered unlimited cash to prevent a credit crunch.
Paying back long-term loans to the ECB means banks become
more reliant on the market for funds, and this may have also
contributed to the extension of maturities in interbank loans.
"We have two effects. One, of course: the panel from which
the rates are calculated is shrinking and some of the banks
which you would expect to add more volumes to the calculation of
the index have left the panel," Commerzbank rate strategist
Benjamin Schroeder said.
"And two: at the moment we have the ... repayments of the
LTROs so you have lower overnight volumes because banks extend
the duration of their interbank trades to bridge the ... LTRO
Eonia rates are calculated on a trade-weighted basis using
data from the same 39 contributors that make up the panel
setting Euribor, an important gauge of how much banks pay to
borrow from their peers.
Euribor and its London-based counterpart Libor are going
through a credibility crisis as some banks have been accused of
manipulating Libor rates. Several lenders have pulled out of the
Euribor panel in recent months.
The overnight rate last settled at 0.081 percent,
comfortably within an extremely narrow range seen in the past
six months. Longer-term rates rose sharply in January --
one-year Eonia rates have risen five-fold to 0.2
percent -- due to expectations ECB loan repayments could
massively reduce the excess liquidity in the euro zone.
The pick-up in volumes and in rates at the longer end of the
money market curve can only be sustained if economic data
continues to improve, traders said, and many in the market have
expressed doubts that would be the case.
"It's only so far we can move away from fundamentals," ICAP
strategist Philip Tyson said.