Demand for ECB funds less than expected

Eurozone banks appeared to be in better shape than feared yesterday as demand for European Central Bank three-month loans fell well short of forecasts.

The ECB said it will lend commercial banks €134 billion ($164 billion) for three months, a record for such loans but much less than the minimum of around €150 billion expected by economists.

The ECB said 171 banks had requested the funds a day before all-time record loans of €442 billion for one year come due.

The previous record for three-month loans was €103 billion, set in late October 2008 following the collapse of the US investment bank Lehman Brothers.

Analysts had forecast that eurozone commercial banks would need around €150 billion to cover minimum reserve requirements at their respective central banks and lending to the broader economy.

The weaker demand indicated that eurozone banks were in relatively robust health and was followed closely by nervous financial markets seeking to determine if one of the world's main economic blocs was firmly on the path to recovery or not.

Europe's single currency jumped to around $1.2263 following the announcement from $1.2214 earlier in Asian trading.

Eurozone banks must repay €442 billion in one-year loans today, the largest amount the ECB has ever provided in a single operation and nearly half of all the cash it is currently doling out to the 16-nation area.

With some commercial banks, notably smaller ones in Germany, Greece and Spain, said to be dependent on ECB funds, observers have raised concern over a possible credit crunch that could limit lending to businesses and households.

"Very high demand would signal a difficult funding situation in the interbank market that is an alternative for healthy banks," UniCredit analysts had written in a research note.

Given an estimated €300 billion in surplus cash at present, analysts had set demand of around €150 billion as a neutral level, and said amounts up to € 250 billion would mean there is not much tension in interbank markets.

Commercial banks borrow ECB funds to maintain regulatory minimum balances that support lending to companies, and individuals in the form of consumer credit and mortgages.