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Lack of cheap funding take-up by banks not worrying, ECB's Lagarde says

One should not read too much into European banks' current lukewarm interest in a cheap funding program from the ECB, the central bank's new president, Christine Lagarde said Dec. 12.

An unexpectedly low uptake of the December tranche of the ECB's targeted longer-term refinancing operations led to net liquidity drainage of nearly €50 billion, analysts at Danske Bank said in a Dec. 12 note. The series was used by 122 banks which took €97.7 billion in funding.

"I would have preferred it to be a little bit higher, closer to [€120 billion] than to [€100 billion]," Lagarde said at her first press conference as the ECB chief.

But while she said the central bank will carefully monitor the next tranche, she added that one should not draw too many conclusions from the uptake in the latest tranche especially as it is taking place at year-end. There are many considerations coming into play when banks are closing their books for the year, she noted.

More tranches left

Lagarde also pointed out there are many more tranches left until the funding series concludes in March 2021.

Danske Bank analysts also said markets should not be concerned, noting that the level of excess liquidity in the market still stands above €1.7 trillion, which is high enough to not trigger a material movement in short-end rates.

It also needs to be seen in the context of the €146.8 billion that banks will voluntarily repay later this month, the analysts noted. The banks' aim to have a smaller balance sheet at year-end also needs to be taken into account, they said.

No 'Japanification'

Asked about the future ECB course, Lagarde said she does not see indications of a reversal rate at this point because there is still credit expansion in the market. The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending.

She also ruled out a so-called Japanification of the eurozone economy, which would see high deflation risks and sluggish growth for an extended period — conditions that have affected Japan.

There is growth potential in the midterm, she said, projecting 1.4% of eurozone growth in 2022. Comparing European companies and households to those in Japan is not justified because there are major differences between the two from a credit perspective, Lagarde said.

"Japanification is not in the cards at all," she said.