The European Central Bank reported rising demand for central bank funds today, a day before a pivotal test of the banking sector's health.
The ECB said 157 euro zone banks sought €163 billion in one-week loans in a regular operation that underpins lending to households and companies. Since mid-May, the amount of funds lent on a weekly basis has risen steadily from about €100 billion.
The ECB is to reveal tomorrow how much it will lend banks for three months, its last and longest operation before repayment of record one-year loans of €442 billion comes due on Thursday.
Response to the three-month operation will give a good idea of how the euro zone banking sector is faring because it is mainly banks that can not borrow funds more cheaply on private markets that are expected to seek fresh ECB cash.
Given an estimated €300 billion in surplus cash at present, analysts see demand of around €150 billion as a neutral level. They said that anything up to €250 billion 'would be a very encouraging signal, as it would point to only limited liquidity needs'.
If €400 billion or more are rolled over however, would be a very worrying signal, they added.
Commercial banks borrow ECB funds to maintain regulatory minimum balances that support lending to companies, and individuals in the form of consumer credit and mortgages.
Banks can also borrow funds from each other, but some in euro zone countries like Greece and Spain have been frozen out of private markets and are now dependent on the ECB for funds.
