ECB Makes Massive $639B Loan to Banks

The European Central Bank loaned a massive $639 billion to 523 banks for an exceptionally long period of three years to steady a financial system that is under pressure from the euro zone debt crisis. It is the biggest ECB infusion of credit into the banking system in the 13-year history of the euro. The ECB is trying to make sure that banks have enough ready cash so they can keep on lending to businesses. Otherwise, a credit crunch could choke off growth and spread the debt crisis to the wider economy through the banks.

Markets rose modestly on the amount of the loans, which was far more than the $391 billion expected. The ECB has served as lender of last resort for banks when they cannot borrow elsewhere. But the credit infusion only treats one of the worst symptoms of the debt crisis. It does not remove the reason investors will not lend to banks—their thin levels of capital reserves against potential losses. The ECB loans also do not do much to reduce heavy levels of government debt. There was some speculation that banks could borrow money cheap from the ECB operation and buy higher-yielding government bonds. But many analysts think it is unlikely they will increase their exposure to government bonds amid fears of default. Many banks have cut their holdings of debt from governments that are in financial trouble. (More ECB stories.)