UPDATE: 3-Month Euribor Drifts Up Ahead Of Stress-Test Results

21st Jul 2010 14:50

By Neelabh Chaturvedi and Nina Koeppen Of DOW JONES NEWSWIRES LONDON (Dow Jones)--The cost of borrowing euros in the interbank market drifted up to its highest level in over 11 months Wednesday, with money-market rates expected to be volatile ahead of the publication of bank stress-test results Friday. The three-month Euro Interbank Offered Rate--the benchmark rate at which term deposits between banks in the monetary union are offered--hit its highest level since Aug. 11, 2009, rising to 0.881% Wednesday from 0.876% Tuesday. Money-market dealers said it has become harder to fix the right price for unsecured short-term funds, after euro-area banks had to repay EUR442 billion in 12-month money to the European Central Bank July 1. Trading volumes in the unsecured money market have also risen sharply over the past three weeks after banks returned to the market, having previously satisfied their funding needs through the ECB's 12-month tender. "Eonia [overnight rate] volumes are twice what they were a few weeks ago," said Laurent Fransolet, an interest-rate strategist at Barclays Capital in London. "The market is trying to find the right price in the near term, given the changes in liquidity positions and excess reserves." The overnight market-funding rate has jumped, to roughly 0.50% Wednesday from around 0.35% late June, and is expected to remain volatile going into the weekend, when banks will have to publicly set out their capital needs. The Committee of European Banking Supervisors will publish the results of the Europe-wide bank stress test Friday. The tests examine 91 European banks for the solidity of their balance sheets, their compliance with capital rules and their exposure to the sovereign debt of 30 European countries under certain stress scenarios. "There are a lot of technical factors which have come back into play that the market did not have to focus on in the past," said Fransolet. The amount of excess liquidity in the banking system rose slightly after banks borrowed EUR201.286 billion at the ECB's seven-day tender Tuesday, up EUR5.63 billion on the week. The number of bidders also rose to 163 from 147 last week. The ECB's main weekly refinancing operation has regained its role as a significant source of funding for euro-area banks, now that the ECB's record EUR442 billion 12-month tender has been repaid. Forty-two of Europe's biggest lenders contribute to Euribor. The banks on Wednesday offered three-month funds at rates ranging between 0.80% and 0.94%. Allied Irish Banks offered a rate of 0.94%, while Erste Bank in Vienna contributed a rate of 0.92%. UBS, Deutsche Bank, HSBC, and Rabobank each offered the lowest rate of 0.80%. -By Neelabh Chaturvedi and Nina Koeppen, Dow Jones Newswires; +44-20-7842-9495; [email protected] (END) Dow Jones Newswires July 21, 2010 09:50 ET (13:50 GMT)