FRANKFURT (Reuters) - Two banks borrowed $1 billion at the European Central Bank’s weekly dollar auction on Wednesday, a rare use of a source of emergency cash created to help troubled lenders during the financial crisis.
The banks were not identified and their reason for tapping relatively expensive ECB funding is not known. But dealers contacted by Reuters said they might have not have been able to source dollars more cheaply on the market because they lacked good collateral.
The ECB declined to comment.
More than five years since the start of the euro zone’s debt crisis, the region’s banking system remains fragmented. Many banks in richer countries, such as Germany, sit on excess cash but some in crisis-hit economies still rely on ECB funding.
Bank use of the ECB’s dollar auction, which allows them to borrow as much as they want provided they have collateral, has declined over the past three years as markets calmed and firms started lending to each other again.
Recent auctions received bids worth just few tens million dollars and some, including last week’s, saw no bidder at all.
On Wednesday, however, two banks borrowed $1 billion. That followed a single bank’s borrowing $1.2 billion on April 27, the largest amount in three years.
Dealers cautioned money markets were not showing signs of stress and the large amounts did not necessarily mean that one or more euro zone banks were struggling to raise dollars, as they did at the height of the crises in 2008 and 2011 EURCBS3M=ICAP.
Lack of good-quality collateral at some banks and the chance to make a small profit on the money market could be part of the explanation, they said.
Unlike commercial banks, the ECB accepts loan bundles and other ‘non-marketable’ assets, which are difficult to buy and sell because they do not trade on exchanges.
That could make it worthwhile for some banks to borrow dollars from the ECB despite interest rates higher than market rates and a “haircut” on the value of euro-denominated collateral.
“It is likely that this counterparty posted eligible, but not marketable collateral, which is not easy to refinance on the market,” a senior euro zone treasurer said.
The borrowers might have then swapped their dollars for euros, making a profit of around 15 or 20 basis points, compared with a zero interest rate if they had taken euros directly at the ECB’s weekly auction, the dealers said.
Such arbitrage could represent a quick and easy source of income for banks at a time when lending margins are squeezed and stricter rules make other types of business, such as trading, less profitable.
“Banks are becoming more aware of the funding costs,” another senior dealer said. “When they can’t find cheap funds in the market, they go to the ECB.”
Additional reporting by Dhara Ranasinghe in London, editing by Larry King