ECB Loans Nearly EUR 0.5 Trillion in First Ever 3-Year Loan Program

The European Central Bank outperformed expectations today as it announced allotment results in its first ever 3-year funding round, targeted at shoring up bank liquidity so that their response to the current crisis would not be a lending freeze. The central bank announced it was lending 489.2 billion Euros ($644 billion) to 523 banking institutions. The size of the loans is significantly higher than the median of forecasts by analysts polled by Reuters and Bloomberg, which ranged from 150 to 600 billion Euros. ECB's hope is that banks will use at least part of the funds by buying sovereign debt from countries like Italy and France, while continuing lending to business, thus providing a vital jumpstart to an ailing economy riddled by fear.The 3-year loan maturity followed the commitment made by ECB president Mario Draghi earlier in the week, to help smaller banks who provided liquidity to small business. A first in its history, the 3-year term is seen as very favorable to such banks because it removes a key uncertainty of funding in their funding operations. Normally, banks borrow in the short term and loan in the long term, benefiting from the spread between respective interest rates. This means that they have to continually refresh their funding sources as shorter maturities approach redemption. It is something that has not been easy to do in the current climate. NY Times says (via Dealogic) that just in the first three months of 2012, banks must refresh over $200 billion euros in such short term loans. For all of 2012, that figure is 700 billion. The allotments announced today mean that banks can avail long term funding at rates that closely resembles much shorter terms. These loans are priced at the average rate of the ECB's main rate over the next three years, says Reuters. Having been cut earlier in the month, this rate sits at a record-low 1.0 percent. Many of the 523 banks being funded through this 3-year program will see their borrowing rates discounted by as much as 3 percentage points, Reuters says. It is still unclear how surgically the intended purpose of the ECB to flow this liquidity to ailed Sovereign borrowers will be fulfilled. Further more, although the allotment is having a positive effect on European sovereign bonds (the bond market already priced in a large-takeup on the 3-year program ahead of its result announcement). This program does not ease concerns that European banks are increasingly becoming dependent on the ECB as a lender of last resort. As high as this offering was, it is yet unclear whether it is to be repeated in the near term. That leaves a much larger liquidity hole with no solution in sight. This optimism and successive realism is showing in the Euro currency versus the US dollar. EUR/USD spiked briefly to 1.3196 before settling at 1.3065 at the time of this writing.