Lenders of Last Resort

The ECB joined the QE Club of Central Banks. It did so indirectly when 523 European banks borrowed €489 billion through the ECB’s Long Term Repo Operation (LTRO) on December 20. That liquidity facility will be available to the banks again on February 28.

In addition, the ECB is likely to lower its official rate from 1.00% to 0.75% on January 12. The rate of growth in the euro zone’s M3, which the ECB uses as a gauge of future inflation, fell to 2.0% in November from 2.6% in October. Growth in loans to households and companies also slowed, while inflation in Germany, the region’s largest economy, decelerated in December.

The ECB’s assets shot up by €239.4 billion to a record €2.7 trillion during the week of December 23, led by a €214 billion jump in lending to euro zone credit institutions in euros. The Fed’s central bank liquidity swap facility rose $45.5 billion over the last two weeks of December. Those funds were mostly borrowed by the ECB and re-lent to European banks needing dollars. This showed up as a €25.3 billion increase in the “claims on euro area residents in foreign currency” on the ECB’s balance sheet over the two weeks through December 23.