The European Central Bank loans less money to banks

The European Central Bank lent less money to banks than it did a week ago as it pares back emergency funding pumped into the money market to avert a breakdown in lending. The ECB allotted 275 billion euros (US$370 billion) in cash to banks for seven days at an average rate of 4.09 percent. The marginal rate was 4.08 percent. A total of 355 banks made bids.

The central bank said Monday it intends to gradually reduce the large reserve surplus which has accumulated in the first weeks of this reserve maintenance period. This is consistent with a normalization of conditions on the shortest term of the money market, it said. The ECB added 211.3 billion euros of extra cash to the money market between Aug. 9 and Aug. While that money has now been repaid, the ECB allotted more than 70 billion euros above the stated benchmark at its last weekly tender.

The ECB and the U.S. Federal Reserve have struggled to restore confidence to financial markets after the U.S. Traders have fled money market funds, considered among the safest instruments, on concern that they have invested in risky collateralized-debt obligations backed by subprime mortgage loans. The yield on the three-month U.S. Treasury bill Monday fell the most since the stock market crash of 1987.

Banks are required to keep reserves worth 2 percent of customer deposits with the euro region’s central banks through the reserve maintenance period, which lasts about a month. The ECB aims to counteract liquidity imbalances at the end of the maintenance period through the use of short-term market operations.