FRANKFURT (Reuters) - Banks will next week return 7.235 billion euros (6.02 billion pounds) of crisis loans early to the European Central Bank, the ECB said on Friday, a larger-than-expected total.
The ECB cut its main refinancing rate to a record low of 0.25 percent in November, automatically reducing the interest rate banks have to pay on the three-year loans, which also made it more attractive to hold on to the funds for now.
Next week's repayment total beat estimates in a Reuters poll of euro money market traders, which had expected banks to return 4.5 billion euros, as they still are prone to returning unneeded funds to the central bank.
By repaying the ECB's crisis funds early, banks are further reducing the level of excess liquidity - cash beyond what lenders need to cover their day-to-day operations - in the system, already at a two-year low of 159 billion euros.
Short-term money market rates are seen rising closer to the ECB's main refinancing rate once excess liquidity falls below a threshold estimated to be in the range of 100 billion to 200 billion euros.
The ECB is monitoring this development as higher bank-to-bank borrowing costs could undermine the euro zone's fragile recovery.
The ECB extended the timeframe during which it will provide banks with all the cash they request in liquidity operations at least until July 2015 this month and left the door open for further rate cuts and other steps.
The ECB flooded the market with more than 1 trillion euros in two LTROs in December 2011 and February 2012 to ease banks' funding strains.
The three-year loans from the ECB will mature in early 2015 and banks now have the option to repay them early.
They have already returned about a third of the money.
On Friday, the ECB said 5 banks would repay 5.105 billion euros from the first LTRO on December 4, and 3 banks will pay back 2.130 billion euros from the second LTRO.
(Reporting by Frankfurt newsroom)