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Spanish Banks Increasingly Rely on ECB Funding
16 July 2010 @ 15:59

MADRID—Spanish banks' recourse to European Central Bank funding hit a record high in June, against a backdrop of intensifying turmoil on financial markets.

Spanish banks raised €126.3 billion ($160.6 billion) in funding from the ECB in June, up 48% from €85.62 billion in May, according to data the Spanish central bank published on its website Wednesday. The June borrowings are the largest on Bank of Spain records dating back to 1999.

Royal Bank of Scotland Group PLC economist Nick Matthews said the jump could have been the result of banks hoarding liquidity ahead of the expiration of a 12-month ECB lending facility July 1. "It might have also reflected ongoing funding difficulties in the wholesale market for some Spanish banks," he added.

Spanish banks' increased use of ECB funding in June ran counter to the broader euro-zone trend. ECB funding for all euro-zone banks fell to €496.62 billion in June from €518.64 billion in May, though the fall was partially the result of heavy use of the ECB's deposit facility. Use of the low-paying deposit facility tends to increase in times of financial stress, and in the past has indicated banks' reluctance to lend to their peers. Spanish banks' use of the ECB overnight deposit facility, however, declined to €9.64 billion in June from €18.15 billion in May.

Luca Mezzomo, head of macroeconomic and fixed-income research at Intesa Sanpaolo SpA, said this decline could be either because Spanish banks were finding more profitable uses for their excess liquidity or because of large liquidity needs.

Funding conditions have gotten more difficult for banks across the euro zone in recent months as investors fret over possible losses on sovereign-debt holdings and a lack of transparency. The deterioration has been especially acute for Spanish banks, which are grappling with the collapse of a decade-long housing boom.

In an attempt to shore up investor confidence, the Committee of European Banking Supervisors is testing 91 European Union banks for their ability to maintain solvency in the presence of adverse economic and financial conditions. Nearly one-third, or 27, of the banks being tested are Spanish.

Also Wednesday, credit-rating firm Standard Poor's reiterated its negative outlook on Spanish banks Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA due to a continued unsupportive economic environment, and its impact on the banks' domestic operations.

S&P also affirmed its AA/A-1+ ratings on both banks, but said that although they are demonstrating resilience to the global downturn, the negative outlook reflects the likelihood that it would downgrade both banks if it were to downgrade Spain's sovereign debt ratings.

"The affirmation reflects our view that Santander and BBVA are weathering the global financial and economic crisis relatively well, particularly the severe downturn in their domestic market, as well as in some other key geographic areas where they operate," said S&P's credit analyst Angela Cruz.

Source: Wall Street Journal

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