(Bloomberg) -- European lenders' reliance on the European Central Bank for dollar liquidity spiked higher this week, yet there has been no commensurate rise in demand for euro liquidity.
That suggests the woes of euro-area banks are, at best, only partly to blame for the surge, and that there might be other catalysts for the dollar-demand spike.
Calendar Effects
This week's ECB dollar-liquidity operations cover the end-of-quarter period for banks, and those operations are regularly associated with a surge in demand.
Money-Market Exodus
The third quarter's spike is definitely of a greater magnitude than the ones that preceded it, however, and that might have something to do with an imminent regulatory overhaul of the U.S. money-market industry. That has already prompted an exodus of assets from prime funds, which are funds that seek higher yields by buying securities like commercial paper.
The fall in prime-fund assets has led to a reduction in the amount of money flowing into more usual sources of bank funding, like short-term corporate debt securities and certificates of deposit, potentially putting a greater demand on the ECB's liquidity provisions. That trend also shows up in three-month Libor, which has reached its highest levels since 2009.
Worries About Banks
And yes, last week has been a difficult one for banks in the euro area, with legal bills, retrenchments, and revelations that hedge funds are reducing their financial exposure all adding to investor concerns.
Taken together, all three elements — reduced dollars available for commercial paper, calendar effects, and heightened investor concerns — form something of a perfect storm for euro-area banks trying to meet their dollar funding needs at the moment.
Fortunately for those banks, thanks to the swap line with the Federal Reserve, they can access whatever dollar funding they cannot raise in the market at the ECB.
To contact the author of this story: Lorcan Roche Kelly in Dublin at lrochekelly@bloomberg.net.
To contact the editor responsible for this story: Isobel Finkel at ifinkel1@bloomberg.net, Paul Dobson
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
