UK banks join the queue for billions in ECB loans

British banks joined the queue for hundreds of billions in cheap three-year loans from the European Central Bank (ECB) yesterday as its funding lifeline for the region's financial institutions surged past the €1 trillion (£847bn) mark.

The ECB's second burst of three-year loans under its so-called long-term repo operation (LTRO) drew bids from 800 banks for a total of €529.5bn.

The higher-than-expected amount takes the total to €1.02 trn after the ECB lent €489bn to 523 banks under its first LTRO last December.

Lloyds Banking Group drew down €13.5bn in ECB loans, putting it among the biggest users, while HSBC borrowed another €350m following the €5.2bn it took in December. Barclays and Royal Bank of Scotland refused to comment on their participation.

Mario Draghi, president of the ECB, sanctioned the move to flood the financial markets with cheap cash last year to avert a credit crunch and bank runs in weaker eurozone states as the sovereign debt crisis intensified.

The initiative has helped to trigger a rally in stock markets, while Spain and Italy have seen their borrowing costs fall as banks pump the three-year loans – charged at knockdown rate of 1 per cent – into previously spurned sovereign debt offering higher returns.

Yesterday's auction further eased the market pressure on Italy, which saw benchmark 10-year bond yields fall to 5.18 per cent, their lowest since last summer, after spiking at a unsustainable 7.52 per cent last November.

Spain's borrowing costs also slipped below 5 per cent yesterday.

In evidence to the Treasury Select Committee, Sir Mervyn King, Governor of the Bank of England, said the loans had staved off a banking collapse in the eurozone's southern states.

Bank shares rallied across Europe. Analysts said the auction had delivered a "Goldilocks" result – handouts not large enough to spark fears over Europe's banks, but high enough to help banks to pay off a big chunk of bank debts falling due this year.