The ECB’s longer-term refinancing operation, or LTRO, changed the timetable. The Frankfurt-based central bank extended 489 billion euros of three-year loans to European banks in December in the first phase of the program. Two months later, it loaned 530 billion euros to 800 firms.
“Thanks to Draghi, the massive shrinkage that was looming six months ago across Europe isn’t happening -- at least not yet,” said Nikolaos Panigirtzoglou, an analyst at JPMorgan Chase & Co. in London. “That’s what the economy needed on the short term.”
Rather than shrinking, lending to households and companies in the euro area held steady this year, ECB data show. Total loans rose to 18.6 trillion euros as of July 31 from 18.5 trillion euros at the end of 2011. The figure masks a decline in countries worst-hit by the crisis, such as Spain and Greece. Lending in Spain fell 5 percent to 1.6 trillion euros in the year through July 31, according to Spanish central bank data.
“The supportive impact of the non-standard measures announced by the euro-system in December 2011 prevented abrupt and disorderly deleveraging, which could have had severe consequences for the economy,” the ECB said in its monthly report published Sept. 13. A central bank spokeswoman declined to comment further.
Banks across Europe bolstered capital instead of selling assets and curbing lending. They did it by retaining profit and swapping debt with other securities, such as subordinated debt, considered to have better loss-absorbing qualities, the European Banking Authority said in July.
Some lenders used the ECB’s loans to purchase sovereign bonds. Under current Basel Committee on Banking Supervision rules, banks don’t have to hold any capital against government debt because it’s considered risk-free.
Basel rules require banks to maintain varying amounts of capital against assets depending on their riskiness. They allow the largest firms to use their own models to calculate how much capital they need. By adjusting the criteria or swapping assets for ones considered less risky, lenders can reduce their risk- weighted assets, even as total assets increase.
The purchase of sovereign bonds boosted total assets at Eurozone banks by about 500 billion euros, according to JPMorgan’s Panigirtzoglou. An increase in volatility forced lenders to mark up the value of derivatives holdings by another 500 billion euros, as it became more expensive for investors to protect themselves from losses, he said. Excluding those two increases, assets have remained almost unchanged, he said.
By reinvesting LTRO funds in higher-yielding securities such as government bonds, banks can reap about 12 billion euros of profit a year, or 10 percent of the total, helping them meet higher capital requirements, Panigirtzoglou estimated.
The 38-company Bloomberg Europe Banks and Financial Services Index has climbed 17 percent this year, outpacing the Euro Stoxx 50 Index, which has gained 12 percent.