ECB announces move to absorb excess liquidity

The European Central Bank (ECB) announced a move to absorb expected excess liquidity in the eurozone banking system yesterday while also ensuring funds to enable banks to maintain obligatory reserves.

The central bank allocated about €73.6 billion ($104bn, Dh381.95bn) to eurozone banks under a regular weekly refinancing operation yesterday, the bank said in a statement, signalling an abundant liquidity stance.

The volume of money lent by the central bank was more than the amount needed by banks to maintain their minimum obligatory reserves at the central bank. The ECB had estimated that amount at €32 bn.

The allocation pointed therefore to a plentiful supply of refinancing funds.

However, the ECB said that it foresaw a big surplus imbalance in liquidity arising, and had said in a separate statement earlier that it would launch a so-called fine-tuning operation to absorb funds at a variable rate up to 1.0 per cent maximum, and for an unlimited volume.

A total of 320 banks participated in the weekly refinancing operation, and the funds were allocated at a fixed rate of 1.0 per cent and for unlimited amounts.

The routine refinancing operations, intended in normal times to cover the minimum reserve requirements of the banks, have become during the financial crisis an instrument to provide regular injections of funding to re-boot the interbank lending market and by repercussion the chain of lending to borrowers throughout the economy.

The market has been regularly flushed with funds since a massive injection of €442bn at the end of June when the ECB opened a refinancing arrangement for the first time.

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