Market Overview

European Banks Beg Central Bank for Spare Change

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The amount of funds that European banks sought from the European Central Bank (ECB) climbed on Tuesday to the highest level since April 2009.

The European Central Bank reported that 178 European banks requested 247 billion euros ($333 billion) in one-week loans on Tuesday. The increased demand for funding rose considerably from the previous week when 161 banks borrowed 230 billion euros ($310 billion) from the ECB.

European banks are becoming more dependent on the European Central Bank as a lender of last resort as they have seen many sources of funding dry up. The Eurozone financial crisis has led to investors trying to reduce exposure to financial institutions holding large amounts of debt from troubled Eurozone countries like Greece. As the finances of countries like Spain, Italy and even France have come under scrutiny, investors have scrambled to reduce their exposure to these countries and their banks.

American money market funds have been pulling funds from these countries at an alarming rate over the last few months and there are even signs that European corporations are moving funds out of countries like Italy, Spain and France. As funding sources dry up, banks have been forced to go to the European Central Bank in order to finance their operations.

While the European Central Bank has been able to help the banks maintain normal operations until now, there's growing concern that the liquidity crisis will cause the banks to reduce lending to their customers, which could slow Eurozone economic growth and exacerbate the financial difficulties facing many Eurozone countries and their banks.

ACTION ITEMS:

Bullish:
Traders who believe that concerns about a Eurozone banking liquidity crisis are overblown might want to consider the following trades:

  • European banking stocks like Banco Santander (NYSE: STD) and Deutsche Bank (NYSE: DB) could surge higher if Europe gets through this period without a major bank failing or a country like Greece defaulting.
  • Investors who are bullish on European banking stocks but would rather spread there investment among a large group of financial stocks might want to consider the iShares MSCI Europe Financials Index (Nasdaq: EUFN). EUFN gives investors exposure to the European financial sector through a diversified portfolio of European financial stocks.

Bearish:
Traders who believe that European banks' growing dependence on the European Central Bank is a bad sign may consider an alternate position:

  • If a Eurozone liquidity crisis causes banks to reduce lending, the ProShares UltraShort Euro (NYSE: EUO) could climb higher as investors dump the euro.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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