IRISH-BASED financial institutions turned to the European Central Bank (ECB) for cheaper funding last month at the highest level on record as the banking crisis showed no signs of easing.
The institutions, which include international lenders based in the Irish Financial Services Centre, increased their borrowing from the ECB to €130 billion at June 26th, up from €118 billion in May.
Irish-based institutions now account for almost 15 per cent of the total €900 billion of ECB loans into the European banking sector. They are borrowing the equivalent of 77 per cent of Irish GDP from the Frankfurt-based bank.
Irish-based banks have relied more heavily on cheaper, longer-term funding from the ECB as profits are squeezed by elevated borrowing costs in the international money markets and higher deposit rates, and by low interest rates on offer to borrowers.
Banks can use ECB borrowings to improve liquidity and fund day-to-day operations. The high level of borrowing from the bank also reflects the large number of international financial firms trading in Ireland.
Updated Central Bank figures show that Irish-based financial institutions were significant beneficiaries of a massive €442 billion liquidity boost to the European banking system by the ECB in a bid to ease funding pressures.
The aim of the measure was to unblock credit markets by lending banks money for up to a year at an interest rate of just 1 per cent.
ECB president Jean-Claude Trichet warned yesterday that European banks may need time to digest this massive liquidity injection and pass it on to households and companies in new lending.
Mr Trichet urged banks to remember their responsibilities to lend to businesses and households.
However, he indicated that the bank was not poised to rush in new policy measures to compel banks to increase their lending further.
Central Bank figures show that Irish-based institutions increased their longer-term borrowings from the ECB by €39 billion last month, taking almost a tenth of the bank’s €442 billion injection.
The discounted funding relieves pressure on the banks’ profitability and means they do not have to rely on paying higher interest rates for customer deposits.
Institutions have also swapped shorter-term ECB borrowings for longer-term loans as they sought to improve their funding with cheap money that they would not have to repay for a longer period.
Longer-term funding owed by Irish-based institutions rose to €110 billion at June 26th from €71 billion the previous month, while shorter-term borrowing dropped to €20 billion from €46 billion.
A spokeswoman for the Central Bank declined to comment. The bank will publish its 2008 annual report at a briefing this morning.
More detailed figures from the Central Bank to be published in the coming weeks will show which institutions have availed the most from the ECB’s liquidity measures.
Mr Trichet rejected suggestions that it was too early to start considering ways of unwinding economic support from governments and central banks. “I would warn against a common and unfortunate view suggesting that it is currently too early, or even totally inopportune, to envisage appropriate exit strategies. Such a view is, in my opinion, plain wrong,” he said.
There are still concerns within the euro zone that lending remains stalled and that institutions still require ECB funding. Mr Trichet said that forcefully addressing toxic assets on the balance sheets of the banks was also necessary for a normal flow of credit to revive economic growth.
He saw the rate of economic decline slowing in the second half of the year and not returning to positive growth rates until the middle of 2010. He indicated the ECB interest rate would stay at 1 per cent. –(Additional reporting: Reuters and Bloomberg)
