Spanish bank borrowing from ECB continues to balloon

Spain's banks borrowed a record €130.2 billion ($166.9 billion) from the European Central Bank (ECB) in July, up 3% for the month, data published on Friday by the Bank of Spain showed.

The sum is the largest lent to Spanish banks by the single currency zone's central bank since its establishment in 1999. The spike in lending follows results of stress tests which showed five Spanish banks would be left with tier one capital ratios of less than 6% under an adverse macroeconomic scenario - the criterion for passing.

In July, the Bank of Spain figures revealed that Spanish lenders' borrowing from the ECB had leapt 48% from €85.6 billion in May to €126.3 billion in June, sparking fears that the country's banks could require a backstop to halt the decline in their health. The stress tests published on 23 July revealed that seven out of the 91 banks enlisted in the tests failed, including the Spanish cajas (regional savings banks) Espiga, Unnim, Diada, Cajasur and Banca Civica. Following the publication of the results, European officials signalled they would not recapitalise the banks and urged those in need of further capital to seek private sector funding options. However, with limited access to interbank markets and worries over Spain's sovereign debt problems, smaller banks have had to rely heavily on the ECB for financing.

Carmen Munoz, a senior director at Fitch Ratings, told CentralBanking.com that borrowing had increased because many of Spain's small lenders were still finding it difficult to access funds on private markets after funding costs started to rise in the fourth quarter of 2009. She said while larger banks were using the ECB's liquidity lines to top up on liquidity, some small banks were still reliant on it as their primary means of funding. "The larger players have been able to access the market but the smaller players are having a hard time," Munoz said. "They have increased their usage, some probably need it, others are just hoarding cash to have ample liquidity," she said, adding that she did not see borrowing going "significantly higher".

While Spanish banks' borrowing requirements continued to rise, lending to banks across the eurozone as a whole fell by 9.8%, to €447.5 billion in July, an improvement from the 4% decline in June.