* Bank demand for 3-month funds steady at elevated levels
* Greek bank taps emergency c.bank liquidity, highlights stress
* Dollar Libor rises but funding squeeze not seen worsening
By William James
LONDON, Aug 31 (Reuters) - Euro zone bank demand for long-term emergency loans from the ECB remained high on Wednesday, showing that while tension in interbank markets was not increasing, funding for some institutions remained difficult.
Banks took 49.4 billion euros of three-month loans from the European Central Bank, slightly above the amount expiring, leaving the system awash with cash in a sign that longer-term interbank lending remains restricted.
“I would rather say this demand is from bad banks who can’t access the market because the difference between Eonia (market rates) and the rate at these tenders is quite high,” said Alessandro Tentori, rate strategist at BNP Paribas.
The loans bore a rate starting at 1.5 percent, in comparison to the market-determined three-month Eonia rate of 0.89 percent. A total of 128 banks asked for cash at the tender.
Highlighting the funding difficulties facing some weaker banks, Greece’s Piraeus Bank (BOPr.AT) said it had used the Greek central bank’s Emergency Liquidity Assistance mechanism, at a cost of about 3.5 percent, in the third quarter.
Uncertainty over whether Greek government bonds will continue to be eligible as collateral against cheaper loans available from the ECB after Greece undertakes a bond swap next month could have spurred the move, analysts said.
“(Greek banks) use a lot of Greek government bonds as collateral which have a huge haircut at the ECB... one reason for this (ELA usage) is that the haircut at the ECB is a limit on the quantity of money they can borrow,” Alessandro Giansanti, strategist at ING in Amsterdam.
Stress in the bank-to-bank borrowing market has been fuelled by concerns over how exposed individual institutions are to bonds issued by the euro zone’s weaker states, crimping appetite to lend money on more than a week-by-week basis.
U.S. money market funds have also been less willing to lend dollars to euro zone banks, with dramatic contractions in lending earlier this month capturing market attention and raising the threat of a full-on funding squeeze.
While the benchmark dollar Libor borrowing rate , currently at its highest in a year, edged higher, other measures of stress pointed to elevated but stable tension.
The three-month cross currency basis swap , used as an alternative dollar funding channel, was steady at -84 basis points — off the most expensive levels near -100 bps seen earlier this month.
The easing of dollar tensions was also evident as banks chose not to borrow dollars through the ECB — an expensive emergency funding option used by one bank two weeks ago. (Editing by Nigel Stephenson)