Beating a dead horse...

...all the major news sources now see the inevitable. Who thinks it is good for the Euro area that EU banks are demanding more U.S. dollar funding than U.S. banks??

The Buck Stops Where?

European banks set several records today in their continuing quest for dollars, signaling demand isn’t easing despite central bankers’ efforts to grease the greenback market. In the ECB’s latest dollar auction, 63 financial institutions bid for more than quadruple the amount of dollars on offer, bidding over $101 billion for the $25 billion auction.

That’s the highest number of bidders in one of these auctions since the ECB opened its swap line with the Fed last December. It’s also the highest amount bid since then, topping the prior record of just over $90 billion, set at the last auction two weeks ago.

To be sure, some of the demand surge likely comes from the fact that the ECB has boosted its swap line. It started auctioning dollars last December in increments of $10 billion, then boosted the sum on offer at each auction to $15 billion earlier this year. In May, it upped the total amount on offer to $50 billion from $30 billion and committed to auctioning $25 billion in 28-day funds every two weeks. Since then, the amount banks bid has risen at each auction.

But even accounting for the difference in the size of the ECB’s various auctions, today was a barn burner, as the ratio of demand to the amount of funds available hit its highest since the auctions began in December.

There could be several reasons for rising demand. Two seem to have held true almost since the beginning of the money-market turmoil last August: Banks remain wary of lending to one another and are hoarding cash for their own needs. The Bank for International Settlements‘ most recent quarterly review suggested European banks’ dollar-denominated investments in “non-banks” — such as the conduits and structured investment vehicles central to the current turmoil — have surged in recent years. Offices of German, U.K. and Swiss banks in the U.K. have upped such investments by $499 billion since 2000, the BIS report said. That leaves European banks hungry for dollars just when US banks are likely to be keeping funds to themselves.

Still, record-high demand might not reflect a dramatic rise in money-market tension. The ECB’s dollar auctions are “definitely a cheap funding option for European banks,” says Christoph Rieger, money-market analyst at Dresdner Kleinwort in Frankfurt. For instance: A benchmark for the rate at which banks lend dollars to each other for one month — called the London interbank offered rate, or Libor — hit 2.46313% today. The interest rate on the ECB’s dollar funds — the same as the rate the Fed offers on its Term Auction Facility, under which it auctions off loans to banks against a wide variety of collateral — was 2.35%, well below the one-month dollar Libor.

European banks might also be getting used to the mechanics of the auctions “and the fact that they have to bid four times the amount they’ll eventually receive,” says Mr. Rieger. Still, he notes, though rising demand may not signal that tensions are getting worse, it certainly suggests they’re not getting better. –Joellen Perry