The European Central Bank said it will lend banks 131.9 billion euros ($161.5 billion) for three months, less than economists had forecast as a landmark year- long loan expires. Banks tomorrow need to repay 442 billion euros in 12-month funds, the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. Demand for the three-month cash today was a litmus test for the health of Europe’s banking system, economists said. Demand was “surprisingly low and certainly a lot less than markets expected,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “It suggests that while there are certainly stresses in the system in some regions, it’s not as bad across the board as many people thought.” European bank stocks climbed after the announcement and U.S. stock futures extended gains. The euro jumped more than half a cent to as high as $1.2275. The Frankfurt-based ECB said 171 banks asked for the three- months funds at its benchmark interest rate of 1 percent. It fills all bids against eligible collateral. Banks can currently borrow three-month money from each other in the market at about 0.76 percent. Wary of Lending Financial institutions are wary of lending to each other after Europe’s sovereign debt crisis fueled concern that some governments may struggle to refinance their debts, prompting investors to shun bonds sold by nations including Greece, Portugal and Spain. The ECB flooded the financial system with cheap cash after the collapse of Lehman Brothers Holdings Inc. in September 2008. While it no longer offers banks 12-month loans, this year’s debt crisis forced it to extend some of its other non-standard measures and to start buying the bonds of high-deficit governments. The central bank still lends banks as much cash as they want at its benchmark rate for periods of up to six months. Eliminating the 12-month facility is part of the ECB’s long-term exit strategy and the bank has taken “every precaution” to avoid a liquidity squeeze, Governing Council member Ewald Nowotny said in Vienna yesterday. The ECB said earlier today it has completed its 60 billion- euro program of covered bond purchases. To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net

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