Money markets euro bank to bank lending improves amid scepticism

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Oct 31 Surveys by the European Central Bank and others suggest the euro zone's bank-to-bank lending market may be finally starting to thaw, but many in the market remain sceptical. They point, in particular, to continued low trading volumes in overnight lending. The 'unsecured' market, where banks lend to each other without collateral, was the main funding source for many banks before it froze at the start of financial crisis. As sovereign debt worries have taken over, however, many in the struggling parts of the euro zone have been left with very little, if any, access to open markets. They have been almost completely reliant on ECB funding to stay afloat. But now the ECB's pledge to prevent the collapse of the euro by buying potentially unlimited amounts of bonds has spurred the first signs of a thaw in the money market."Banks reported an improvement in their access to retail and wholesale funding across all funding categories. For the fourth quarter of 2012, banks expect funding conditions to keep improving." the ECB's Bank Lending Survey said on Wednesday. The details show the pick up is likely to be small scale. Only a net 10 percent of banks questioned by the ECB see any form of improvement before year-end.

But the figures marry with a report by rating firm Fitch this week that showed U.S. money market funds are beginning to lend to the euro zone again."For the third consecutive month, U.S. prime money market funds increased their exposure to euro zone banks," it said, adding there had been a 16 percent rise in value terms since the end of August. Its analysis also showed the proportion of collateral-backed loans had dropped from 40 percent to under 25 percent over the last three months. With overall exposure rising, it suggests 'unsecured' lending was increasing."This reduction in secured exposure is another potential sign of a more positive investor posture towards banks in the region," Fitch said.

EONIA MOANS But while Fitch's findings point to a small rebound in trust in the bloc, the amount lent by funds to euro zone banks remains 70 percent below the level it was at the middle of last year. Money market traders also remain sceptical about whether there really has been an improvement.

Trading volumes in overnight money markets have averaged at around 25 billion euros over the last couple of months, around a third of the peak volumes seen towards the end of 2007 and roughly half of those at the end of 2010."I have not seen any improvement at all," said one money market trader working for a bank based in the euro zone's healthier northern core."Volume on Eonia is still very low and it is going to stay very low. We just have to wait till there is less stress around Spain and the other periphery countries and that is going to take time."As well as its pledge to keep the euro alive, the ECB's move earlier in the year to stop paying interest on money parked with it overnight has also forced some banks and funds to rethink their previous reluctance to lend to peers. At the same time, high penalty charges imposed on Spanish and Italian sovereign bonds by clearing houses like LCH. Clearnet and CCG has left banks in both countries willing to pay more for funding in the open market. Somewhere in the middle, deals are being done."Some of the UK banks have come in (and started lending to Spanish and Italian banks)," said another money market trader, who like the first requested anonymity."Levels (interest payments) above zero percent are fine for them and they are also doing it to cover their shorts," he added, referring to bets made on the value of a sovereign bond going down.