Draghi Presents Plan to Ease Bank Lending

European Central Bank President Mario Draghi has coupled an interest rate cut with an offer to lend banks unlimited cash for up to three years as European officials head to Brussels for a summit where they will hope to construct a “comprehensive” solution to the debt crisis.

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The ECB cut its benchmark interest rate by 25 basis points to match a record low of 1 percent. It also unexpectedly introduced new three-year loans for banks and loosened collateral criteria by making credit claims such as bank loans eligible and reducing the rating threshold on asset-backed securities.

Officials speaking on condition of anonymity ahead of today’s policy meeting said that, though three-year loans were being discussed, they were unlikely to be introduced at this stage, with the bank instead extending loans to just two years.

The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi told reporters in Frankfurt today after chairing a meeting of the ECB’s Governing Council.

The central bank has chosen to focus on reviving bank lending rather than increasing government bond purchases, leaving it to European Union leaders meeting in Brussels this week to stamp out the debt crisis.

Last week, Draghi pushed EU leaders to deliver a “fiscal compact” like that being proposed by Germany and France, hinting that the ECB might then be willing to help support financial markets. However, repeating his call for a fiscal compact compact today, Draghi denied that he had hinted the ECB would automatically support such an initiative with more bond purchases.

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The ECB also cut banks’ reserve ratios by half to 1 percent, and will stop fine tuning operations at the end of each reserve maintenance period. Three-year loans will be conducted as a fixed rate with full allotment, said Draghi.