European Central Bank Makes Massive Loans to 523 Banks

Posted December 21st, 2011 at 11:40 am (UTC-5)
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The European Central Bank is lending a record amount of money to banks in the 17 nations that use the euro in hopes of limiting the widespread effects of the governmental debt crisis.

The central bank said Wednesday it would make $638 billion in three-year loans to 523 banks in an effort to encourage them to advance credit to businesses and consumers and buy the government bonds of debt-ridden governments.

It was the biggest cash infusion into the continent's banking system in the 13-year history of the euro.

But numerous analysts said the large amount may be too little to help cash-short banks worried that some governments could default on their loans. The analysts said banks, rather than making new loans to spur the eurozone's stagnant economy or buying governmental securities, might simply add the cash to their reserves or use it to refinance their own debts.

While the cash might help the banks, analysts also said the loans showed that they are dependent on the central bank for funding, rather than other private financial institutions they would normally borrow money from if the continent's economy was flourishing.

The European Central Bank said it would lend the money at its benchmark interest rate, currently a very low 1 percent. The central bank plans to make more loans to private banks in late February.

The total for Wednesday's loans exceeded the $578 billion figure the ECB lent banks in mid-2009 when the world financial system was reeling from the collapse of the U.S. investment bank Lehman Brothers.