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Money markets ecb repayments point to more use of emergency funds


* ECB repayments indicate increased emergency funding* Reliance on some national central bank cash growingBy Kirsten DonovanLONDON, May 28 European Central Bank accounts for the last week are set to show banks made further early repayments of cash obtained through longer-term liquidity operations, highlighting the trouble some institutions are having funding themselves. More than 21 billion euros of longer-term refinancing operation (LTRO) cash was repaid last week, including around 9 billion euros of funds from December's three-year funding bonanza. That is on top of an almost 11 billion euro repayment earlier in May. But that fall in the outstanding amount corresponded with a rise in the ECB's balance sheet item that accounts for the Emergency Liquidity Assistance (ELA) funding provided by national central banks. The weekly balance sheet, published on Tuesday for the previous week, is expected to show a similar shift in funds.

Commerzbank rate strategist Benjamin Schroeder suggests this may be linked to credit rating agency Fitch's downgrade of Greek covered bonds to "junk" that made such paper ineligible as collateral at the ECB. Technically, banks are not permitted to repay LTRO funds early. There are exceptions for the December and February three-year funding operations, but even those officially cannot be repaid before one year has passed unless a bank runs out of eligible collateral or loses status as a ECB counterparty."You're getting this Balkanisation, where you're dividing up the risk and apportioning it through the national central banks," said RBS rate strategist Simon Peck.

"At the end of the day banks are getting the liquidity that they need, be it from the ECB or the ELA....but it just depicts the ongoing fragmentation that we have seen for some time now."National Central Banks are able to accept, at their own discretion, lower quality collateral than the ECB, allowing banks to acquire the funds necessary to keep operating. But that is not without its risks should the borrowers be unable to repay the cash.

"The concern is that...if the central bank has to mark this collateral to market (prices) it could be sitting on quite sizeable losses if the recipients of this funding can't repay it," said Rabobank rate strategist Richard McGuire."It gives the lie to the notion that the ELA lending is ringfenced and not a euro system liability...as the euro system would probably have to backstop those losses."The 11 billion euros of LTRO repayments earlier in the month were believed to be linked to the ECB's move to stop providing liquidity to Greek banks left temporarily undercapitalised after the Greek debt swap. The exact amount of funding taking place through regional ELAs is not definitively clear, but the ECB's balance sheet item reflecting it - other claims on euro area credit institutions - has risen by over 150 billion euros since the beginning of April alone, highlighting the increasing reliance on such funding."It becomes more of an issue if the rules regarding what is considered as acceptable collateral were to change," RBS' Peck said."But ELA facilities are emergency facilities, so you would expect by nature of their design that the collateral rules would remain sufficiently soft".

Money markets new rate index aims to challenge libor


* Euribor-EBF dollar rates double those of Libor* Dollar Euribor panel heavy on German, Spanish banks* Libor likely to retain global benchmark statusBy Richard Leong and Kirsten DonovanNEW YORK/LONDON, April 2 A new index that shows European banks' cost to borrow dollars is set to challenge the benchmark status of Libor, which is the subject of a global probe over whether banks manipulate it. On Monday, Euribor-EBF, whose members are national banking associations in the European Union and has set the Euro Interbank Offered Rate (Euribor) since 1999, launched its dollar Euribor fixings in response to demand from European banks. But the initial sets of dollar Euribor readings indicate European banks' borrowing costs for dollars are more than double the levels reported by the older rival, the London Interbank Offered Rate (Libor). For example, the three-month dollar Euribor was fixed at 0.95714 percent on Monday, compared with 0.46815 percent for the three-month dollar LiborThe huge gap between the two rates raised skepticism about dollar Euribor, whose high level runs counter to the recent declining trend on what banks charge to borrow dollars."I don't see the near-term usefulness of it," said Mike Lin, director of U.S. dollar funding at TD Securities in New York. European banks have sought an alternative to Libor, which began in 1986 and has been overseen by the British Bankers' Association as a reference for banks and traders who engage in interest rate derivatives.

About 26 years later, Libor is a benchmark for some $360 trillion worth of financial products such as loans, derivatives, mortgages, bonds and interest rate swaps."The benefit to replace Libor is huge," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate and Investment Bank in New York. However, Libor is at the heart of a global investigation of whether banks colluded in setting the rates."Market actors have been calling for such a fixing for the last three years", Euribor-EBF Chief Executive Guido Ravet said in a statement on the group's latest rate index. Dollar-Euribor is the second high-profile attempt to challenge Libor's benchmark status. Broking firm ICAP introduced the New York Funding Rate (NYFR), which has not gained much traction since its launch in June 2008.

HEAVY ON WEAKER EUROPEAN BANKS The big difference in dollar borrowing costs between Libor and Euribor could be accounted for by the two vastly different group of banks that contribute to calculation of the two indexes, analysts said. The 18 banks that participate in the dollar Libor panel are a diversified group of global institutions, including France's BNP Paribas, Germany's Deutsche Bank AG, Britain's Barclays plc and J. P. Morgan. On the other hand, the 20 banks that report to the dollar Euribor are mostly the smaller, lower-tier European names. Seven of them are German, while four are Spanish. The dollar Euribor also feature two Chinese banks -- China CITIC Bank and Bank of China , as well as Turkish bank Garanti Bank.

The lofty dollar Euribor rates partly reflect the lingering tight credit conditions faced by some European banks due to the region's sovereign debt problem, analysts said."Because it's European banks lending dollars, they'd command a premium when lending a foreign currency," said Rabobank rate strategist Richard McGuire in London."Some of these banks can't get hold of dollars so easily, so to lend them on, you'd want paying for the privilege," he said. Some analysts argue that while some weaker European banks face tough times raising dollars in the open market, the European Central Bank's pumping more than 1 trillion euros in cheap three-year funds into the bank system since December has greatly alleviated the stress on many banks. Other indicators in the interest rate and currency markets, besides Libor, suggest the scramble among European banks for dollars has lessened since the end of 2011, when investors were fearful of a messy Greek debt fault."It's a mystery to me. I don't know how representative they are of the dollar interbank market," CA-CIB's Keeble said of Monday's dollar Euribor levels. Still, dollar Euribor has another tool for the market to monitor funding stress."It's another index you can watch," said TD's Lin. "They are trying to capture another group of banks."Until dollar Euribor proves its reliability over the long haul, analysts said Libor will likely retain its benchmark status."I don't think the BBA will be losing sleep on this one," CA-CIB's Keeble said.

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