European Central Bank Lends $639 Billion Over 3 Years

Of the euro489 billion ($639 billion) loaned out, some 61 percent was rolled over by banks from other ECB credit offerings, meaning about euro200 billion ($261 billion) represents new liquidity that wasn't previously in the banking system, according to analysts at the Royal Bank of Scotland. One likely use for at least some of that fresh money is to pay off euro230 billion ($301 billion) in bank bonds coming due in the first three months of 2012.

The concern has been that if banks cannot borrow to refinance those obligations they will find the money by cutting back on loans to businesses. Those loans enable businesses to operate day to day, expand their operations and hire people.

There was some speculation that the loans would help governments since banks could borrow money cheap from the ECB operation and buy higher-yielding government bonds.

But many analysts think it is unlikely they will increase their exposure to government bonds amid fears of default. Many banks have cut their holdings of debt from governments that are in financial trouble.

"We still believe it is difficult to reconcile a government desire for banks to continue buying debt with the need for banks to reduce risk exposure associated with government debt," said Chris Walker, an analyst at UBS.

In making the loans, the ECB was playing its role of supplier of liquidity, or ready money to operate with, to banks. That is a typical job for central banks, especially in a crisis.

ECB president Mario Draghi has stressed the central bank's role in supporting the banking system even as it has refused to play that role for the indebted governments themselves by buying large amounts of their bonds.

Draghi says governments must be the ones to reduce their spending and deficits, and should not depend on a central bank bailout.

In contrast to its tough line with governments, the bank has made easy and abundant credit to banks its main tool in dealing with the effects of the eurozone's two-year-old financial crisis.

Alongside its efforts to shore up the banks, the European Central Bank has also been cutting interest rates to support the ailing eurozone economy. It has reduced its main refinancing rate from 1.5 percent to 1.0 percent over the last two monthly meetings in the hope that lower borrowing costs will stimulate growth by making credit cheaper for businesses.

Under the terms of Wednesday's loans, the banks will pay the average refinancing rate over the three years. The ECB reviews the rate each month and it will almost certainly change. Banks also have the flexibility of repaying the money after a year if their situation improves.

Still, the credit infusion only treats one of the symptoms of the debt crisis. It does not remove the reasons banks remain wary of lending to each other — especially, their thin levels of capital reserves against potential losses. And it doesn't cut the large levels of debt carried by governments.

European officials have said banks need to raise euro115 billion ($150 billion) in new capital — but finding that money is not an easy task in the current environment of fear. Investors are leery of putting more money into banks. It would be politically unpopular for governments to do it, and their finances are stressed as well.