Draghi urges banks to take cheap ECB loans

In case there was any remaining stigma left in taking loans from a central bank, the Wall Street Journal reports that Mario Draghi, the head of the ECB, permanently erased it.

Mr. Draghi observed that 'the facilities were there to be used' and those banks that are trying to express 'virility or manhood' by not taking the loans are accessing different government funding programs.

Regular readers know that one of the key elements of the blueprint to save the financial system is that the central banks will lend against any good collateral on a bank's balance sheet.

The ECB has taken this step and in addition made it easy for banks to pledge collateral by removing any stigma.

European Central Bank President Mario Draghi openly encouraged European banks to take advantage of the ECB's next offer of cheap three-year loans later this month, saying use of the facility shouldn't be interpreted as a sign of weakness. 

"The facilities are there to be used. There is no stigma whatsoever on these facilities," Mr. Draghi said at a news conference... 

But it is the flood of cash into European banks that is the centerpiece of Mr. Draghi's stepped-up response to the debt crisis. 

In December, the ECB lent banks €489 billion ($648 billion) at a maturity of three years, the central bank's biggest commitment of funds to date. That action is credited by many economists and ECB officials, including Mr. Draghi, with averting a credit crunch. 

The ECB took steps Thursday to make it even easier for banks to access the central bank's next tranche of three-year loans at the end of February. 

Officials approved new eligibility criteria for some euro-zone countries seeking to use the central bank's liquidity operations. The national central banks of Italy, Ireland, France, Spain, Austria, and Cyprus may accept more collateral as a result. The move makes securities valued at up to €700 billion potentially eligible as collateral for ECB loans, Mr. Draghi said, but because of the ECB's risk-management policies and the valuation haircuts that it applies to collateral, that would translate into around €200 billion in actual loans.... 

According to a Goldman Sachs analysis on ZeroHedge, the newly eligible collateral is actually 7 trillion euros.  This translates to around 2 trillion euros of ECB loans or approximately the amount of unsecured funding in the Eurozone banking system.

But critics say that the ECB's unprecedented loans are making fragile banks in Southern Europe and Ireland even more dependent on the central bank for funding, exposing it to losses in the event of a government default or banking collapse in the euro zone. 

A number of European banks have said in recent days that they didn't take the ECB up on its loans in December, fearful of being tagged as bailout recipients. 

"The fact that we have never taken any money from the government has made us, from a reputation point of view, so attractive with so many clients in the world that we would be very reluctant to give that up," said Deutsche Bank Chief Executive Josef Ackermann, explaining to analysts last week why the German lender didn't borrow from the ECB. 

A number of big British banks, including Barclays PLC, Standard Chartered PLC and Lloyds Banking Group PLC, opted not to borrow from the ECB, according to people familiar with the matter. 

Mr. Draghi hit back at what he called statements of "virility" and "manhood" from bankers saying it would be "undignified" to take ECB loans, though he didn't cite anyone specifically. 

"The very same banks that make these statements access facilities of different kinds that are still government facilities," Mr. Draghi said.