Banks to repay €6bn of crisis loans early

Banks will return €5.905 billion of crisis loans early to the European Central Bank next week, the biggest repayment since late May in a sign they are returning to health.

However, the bumper early repayment is a potential problem for the ECB if the withdrawal of cash from the financial system pushes up market interest rates - a trend the central bank is trying to counter with its ‘forward guidance.

The ECB said yesterday it was ready to cut interest rates or pump more money into the euro zone economy if needed to bring down money market rates.

The policy option with fewest side effects to steer down market interest rates would be another ultra-long-term funding operation, or LTRO - a measure that could come with more favourable terms than the existing loans to attract banks.

Banks took more than €1 trillion of three-year loans from the ECB in two LTROs in December 2011 and February 2012, of which the first matures in January 2015.

They now have the option to repay the loans early and have returned almost a quarter of the money already.

Today, the ECB said five banks would repay €3.705 billion from the first LTRO on September 11th and two banks will pay back €2.2 billion from the second LTRO. (Reuters)