Banks gorge on cheap loans in second LTRO

The European Central Bank (ECB) has launched its second Long-Term Refinancing Operation (LTRO), with hundreds of banks scooping up €530 billion via its cheap three-year loans programme.

Appetite for the latest LTRO was slightly above experts' expectations, with many predicting banks would borrow €500 billion via the scheme.

The ECB's LTRO works by injecting a bulk sum into the eurozone's financial system, helping to shore up the region's lenders that are struggling to raise money on capital markets. At the same time, Europe's teetering financial institutions have had to contend with increased capital requirements, putting further pressure on banks' balance sheets.

The banks that took part in today's LTRO will access short-term loans at an interest rate of 1%.

The first programme, launched in December last year, attracted a total of 523 banks which borrowed a total of €489 billion.  The lenders that took part were thought to include part-nationalised institutions Lloyds Banking Group and Royal Bank of Scotland.  Others, like Deutsche Bank, said they had chosen not to participate because the scheme carried with it a 'stigma' of being in difficulty.

A total of 800 banks took part in today's LTRO, after which the euro single currency showed signs of weakness and fell.

Economists reacted positively to the new operation though, with Capital Economics' claiming it reduced the chances of the UK suffering another crunch.

'The ECB’s second long-term refinancing operation conducted this morning should alleviate the risk of a renewed credit crunch, not just in the euro-zone, but in the UK too,' the consultancy said,

However, Capital fears UK bank funding markets will still look strained despite the operation.  'We continue to anticipate some tightening of credit conditions for firms and households over the next few months,' Capital said.