THE EUROPEAN Central Bank lent banks €20.6 billion of 13-day funding yesterday, in a specially scheduled operation designed to smooth the expiry of the ECB’s final injection of one-year loans given last year.

A total of 32 banks took funds in the fixed rate, limit-free tender and analysts said the relatively small number of bidders could be a positive sign about the state of the euro zone banking sector.

The handout was part of a string of operations the ECB put in place to help the still-fragile euro zone money market through the traditionally tense end of year period and a deadline on Thursday to pay back nearly €200 billion of previously handed out one-year and three-month funding.

Banks took just under €150 billion in three-month funding on Wednesday, well above analysts’ average expectations of just over €100 billion in the run-up to the operation.

However, the relatively restrained demand for the 13-day cash will see an overall decline in ECB funding in money markets and leave the focus on how much funding banks take in January when markets are back in their stride after year-end.

“All in all, demand for liquidity remains sustained but falling,” said analysts at UniCredit in Milan.

“The reduction in the number of bidders also sends a constructive message about the soundness of the European banking sector as a whole.”

Euro zone debt market tensions forced the ECB to postpone its plans to unwind some of its crisis support measures this month and extend unlimited one-week to three-month funding operations until at least mid-April.

Many banks in Ireland, Greece and Portugal remain locked out of open markets and heavily dependent on the ECB for liquidity.

ECB executive board member Juergen Stark said in an interview on Wednesday that those banks would not dictate the ECB’s monetary policy or prevent it phasing out its crisis support. – (Reuters)