FRANKFURT (MNI) – The significant increase in the number of bidders
for the European Central Bank’s second three-year tender on Wednesday,
along with easing pressure on bank funding, should raise hopes that
fresh loans will be chanelled into the real economy.

While the first operation in December was no doubt a game-changer
for financial markets, lending data released after it did not suggested
that the ECB’s main goal, “to finance the real economy and especially
small and medium-sized enterprises (SMEs),” had been achieved.

Recent comments by ECB President Mario Draghi suggest that the
central bank expects the second operation to have a more positive impact
on lending, and the details of Wednesday’s operation will likely have
reinforced that view.

The ECB said that eight hundred banks bid for a total of E529.53
billion for the three-year loans. This compares to E489 billion demanded
by 523 banks in the December operation.

The significant increase of bidders in today’s LTRO suggests that
more small banks may have participated in the second ultra-long
operation than in the first — supported in part by the ECB’s change in
collateral rules to include credit claims.

In loosening its collateral rules, the ECB had chosen credit claims
specifically to ensure that “this facility would reach not only the
large banks, which usually have plenty of collateral…but also the
small and medium-sized banks that are most important for financing
SMEs,” the central bank said. The plan appears to have panned out.

Larger banks participating for a second time may also be more
likely to use the borrowed funds for lending, Draghi suggested Sunday.
He said that “one can infer from the numbers” that much of the [first]
LTRO has been used by the banks to repurchase their bonds and satisfy
their funding needs.

“One expectation now is that having satisfied their funding needs
for this year at least, the banks will be more inclined to use this
money – which was our primary expectation really – to expand credit into
the real economy,” Draghi continued.

There remain of course substantial downside risks to this
optimistic assessment, and only time will tell whether the three-year
loans will find their way into the real economy.

Rating agency Standard & Poors’ warned Wednesday that the European
banking sector as a whole remains undercapitalized compared with other
regions. Banks will continue to deleverage, sell or close non-core
businesses, recognize problem assets, and accumulate capital in 2012,
S&P said in a report released after the ECB had announced the result of
its 3-year LTRO.

Figures from today’s operation also could be partially distorted by
non-Eurozone banks taking advantage of extra cheap, long-term funds.
UK’s Lloyds, which had not participated in the first LTRO, confirmed it
had picked up 11.4 billion pounds sterling in today’s operation. The ECB
does not disclose to whom it lends money in any particular operation.

To assess the impact of the first three-year tender on credit
conditions, the ECB is currently conducting a special bank lending
survey, Draghi revealed last week. The central bank may well do a
similar exercise for the second operation.

The ECB would not disclose when or whether it will release the
results of its survey. But Governing Council members will likely be more
tuned in than usual to banks’ lending intentions and behaviour, and
their comments should be particularly worth monitoring.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$]