In the news this week was word that in the first ECB auction of dollars since the Fed dropped the price and the collateralization requirements on swap lines last week, demand soared from less than $1 billion to $50.7 billion. Comments are to the effect that the lower rate “removed the stigma” of borrowing from the central bank. (See NY Times article)
Excuse me! I would have thought that when you drop the price and sales soar, that mean the new price is attractive. It must mean that the banks could borrow at 59 basis points (109 basis points at the last auction) for 84 days and invest at a profitable spread in something that requires little regulatory capital, such as a triple-A dollar-denominated bond that comes due in a year. Yes, there is interest rate risk and there is liquidity risk. But these are banks; their raison d’etre is said to be “maturity transformation”.
Thirty-four banks took part in this scheme, suggesting to me that this is a broad-based way to increase earnings with little apparent risk.
What does that mean for the proposition that banks tapping the ECB’s dollar facilities are cash-strapped because they have lost access to the U.S. money market funds? It suggests to me that not so many are as cash-strapped as they have been said to be. They lost the money market funds months ago and have made whatever arrangements they have made in the interim. The borrowings this week suggest that European banks will borrow from the ECB in order to make profits. Yes, the stigma has been removed. Earnings will go up. Greed is good.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.