European Banks Repay Debts as Economic Systems Recover

By Korollos Shalaby

Many banks will return 137.159 million euros (184.3 million U.S. dollars) of emergency loans received during the financial crisis to the European Central Bank, in a sign that at least some parts of the European banking system has recovered.

The ECB lent more than a trillion euros to banks-hundred to three years in financing operations between December 2011 and February 2012, a plan that the council president, Mario Draghi, said that it "avoided a great, massive credit crunch. "

The ECB said Friday that 278 banks had decided to repay the loans at the first opportunity, on January 30, but did not name them in particular.

A total of 523 banks had used the first of two programs of long-term loans, known as (LTRO), a little over a year.

The German debt prices fell, while bank shares and the euro rose on news of the advance payment, which exceeded the forecast of 100,000 million euros in a Reuters poll of traders.

Banks can return the money in advance on a weekly basis from now. The repayment of the second LTRO begins on February 27.

“I expect the pace to slow considerably in the next week," said Nordea analyst Jan von Gerich. "Some slightly stronger banks returned the money as soon as possible, while taking money weaker in the second LTRO," he added.

"Do not believe the returns will return to a level where interest rates start to rise," he said.

Strong prepayment will be good news for some ECB officials who were concerned about the increased risks that the central bank had in its balance sheet with loans.

German Chancellor Angela Merkel said at the World Economic Forum in Davos, Switzerland, on Thursday: "it will be important for Europe that gave ample liquidity to banks last year collected again."

Banks generally took the funds for three reasons: as insurance in case of a worsening of the euro zone crisis as a means to finance purchases of government bonds with higher returns and to fund their loan books if they had problems accessing the cheap credit.

Banks in Spain and Italy were among those who poured money into government bonds of their own countries, whose yields were at record levels, but have since declined strongly as a result of loans from the ECB and its promise to buy bonds of nations in trouble.

They seemed less likely to repay the money at the first opportunity, preferring instead to stick with the bonds on which they have reaped huge profits with relief euro zone crisis.

The prepayment of these loans is a distinction for banks looking to impress investors and rating agencies and distance themselves from their troubled rivals. However, the risk of doing so would force them to make an extra effort.

Coeuré Benoit, in charge of market operations at the ECB's executive committee, tried to alleviate those concerns last week to minimize the possibility that banks will return a very large amount of emergency loans.

Korollos Shalaby is a nationally acknowledged mortgage expert with over 6 years experience as a loss mitigation expert and mortgage finance consultant. He has owned several companies and has been at the forefront of all lending and banking practices since 2006.