The construction site of the new headquarters of the European Central Bank is seen behind a railroad bridge, with the skyline of Frankfurt’s city centre on the background. Banks will return €22.65bn ($31.15bn) of crisis loans early to the European Central Bank next week, the ECB said yesterday, putting pressure on money-market rates and on the ECB to ease its policy.

Reuters/Frankfurt

Banks will return a massive €22.65bn ($31.15bn) of crisis loans early to the European Central Bank next week, the ECB said yesterday, putting pressure on money-market rates and on the ECB to ease its policy.

The amount is the highest weekly repayment since February, when banks had the first chance to pay back funds from the second 3-year loan. It will result in less money sloshing in the system, as banks are getting get into shape for an upcoming balance sheet review.

Banks took more than 1tn euros from the ECB in 3-year loans from the ECB in late 2011 and early 2012. The pace at which banks are voluntarily returning the loans early has picked up over recent weeks. The loans mature in early 2015.

The repayments will lead to a decline in excess liquidity — the amount of money in the market beyond what banks need for their day-to-day operations. It is now at €163bn and will fall further, to levels where the repayments put stronger upward pressure on short-term money market rates.

Higher short-term rates are not going to delight the ECB, which cut rates in November to aid the ailing economy, and increases pressure on it to counteract the development. However, analysts said that it is unlikely to react immediately.

“In the very near term, I don’t really think that the ECB will do something,” Barclays rate strategist Laurent Fransolet said. “The bigger question really is how much further do you go down. Our view is that certainly by middle of 2014 you are below 100bn.”

The repayments were almost four times the expected amount in a Reuters poll of money market traders — they had expected 6.0bn euros to be returned to the central bank.

The ECB will take a thorough look at the eurozone’s top lenders’ books before it takes up responsibility as their supervisor from November next year.

ECB President Mario Draghi has lamented the fact that banks used much of the money to buy government bonds instead of lending it to the real economy, and said that any new long-term loans would increase lending to the private sector.

Executive Board member Peter Praet said yesterday that the ECB could offer lenders more liquidity if the bank tests crimped their lending.

Banks have already started to tidy up their balance sheets in anticipation of such tests, in addition to regular year-end clean-up.

“As you go toward the end of the year, everyone is always looking their best,” Fransolet said, and added that LTRO funds are also becoming less attractive as their residual maturity drops below 1 year soon, meaning their treatment in maturity profile will change.

Yesterday, the ECB said seven banks would repay €3.32bn from the first LTRO on December 18, and nine banks will pay back €19.33bn from the second LTRO.

After these repayments, banks have one more chance to repay loans this year, before a year-end break. Repayment announcements will resume on January 10.