523 banks borrowed money after the European Central Bank announced that it would issue loans for lending institutions to shore up their finances.
The ECB offered banks a way to shore up their capital in its first ever three-year loan offers, meant to avoid another credit crunch in the New Year.
The central bank also hoped that the money would be used to buy Italian and Spanish bonds, as another way to provide stimulus to debt-plagued eurozone countries.
Experts had underestimated banks’ needs for funding, as polls before the loans launch estimated 310 billion euros in borrowing. The huge grab for 489 billion euros of loans pushed the currency up to a one-week high against the dollar.
European shares also received a boost as a result of the three-year loans.
These loans mark the most the ECB has ever pumped into the European financial system, topping even the 450 billion euros it leant in one-year loans after the financial crisis.
The ECB hopes that its ultra-cheap funding to banks will bring about financial stability in Europe, as extra cash will bolster confidence in European banks.
Encouraging banks to buy Spanish and Italian bonds with the loans could bring calmer markets and ease the debt crisis that has yet to show signs of stopping.
Experts say that the larger-than-expected take-up of loans has positively affected liquidity in the banking system, and that banks in the eurozone’s debt-laden states most likely borrowed most from the ECB.
Though the Bank and governments that loaned banks the money have urged them to invest in Italian and Spanish government debt to lift the eurozone crisis, there is no guarantee that banks will follow through.
It is particularly difficult for banks to comply with eurozone pressure now, as banks are also under pressure to cut risk, shore up capital, and lend to businesses. Economic stability and growth depend on both.
Because of this, Chief Euroepan Economist and Capital Economics, Jonathan Loynes, said that his organization remains “skeptical” that the ECB’s bold loan offerings will be able to ease the soverign debt crisis.
Loynes said that the move did, however, avoid an inter-bank credit crunch and “addressed recent signs of renewed tensions in credit markets.”
Critics have said truly solving the eurozone crisis would require the ECB to take up more direct action in buying up government bonds. The organization has said it is reluctant to do this.