The 523 euro-area lenders took a record 489 billion euros ($638 billion) from the Frankfurt-based central bank in 1,134- day loans today, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. That equals about 63 percent of the European bank debt maturing in 2012, according to Goldman Sachs Group Inc. analysts.

“The perceived stigma attached to central bank borrowing has not prevented euro-zone banks from making extensive use of the ECB’s offer,” said Martin van Vliet, an economist at ING Group in Amsterdam. “The take-up of loans is massive.”

By flooding the banking system with cheap money, policy makers are attempting to stave off a looming credit crunch by encouraging banks to maintain lending. Politicians, including French President Nicholas Sarkozy, are also pushing the banks to use the cash, which is borrowed at a current interest rate of 1 percent, to purchase higher-yielding southern European sovereign debt, thereby forcing down borrowing costs in the region.

Barclays Plc estimates the lending will inject 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans.

Bond Yields Rise

Banks have become increasingly reliant on the ECB for funding after the market for bank debt seized up and U.S. money markets withdrew lending. Senior unsecured bank bond sales have tumbled 80 percent to 14.6 billion euro since the markets constricted at the end of July compared with the year earlier period, according to Morgan Stanley data.

Government bond yields rose on the news as traders questioned whether banks would be willing to risk buying more southern European sovereign debt when their investors are urging them to reduce their holdings. Italian 10-year government bond yields climbed 12 basis points to 6.69 percent while the rate on comparable Spanish debt surged 17 basis points to 5.2 percent. The Bloomberg Europe Banks and Financial Services Index (BEBANKS) rose 0.6 percent by 2:30 p.m. in London.

Demand for so-called carry trades, whereby banks borrow at a low rate to invest in higher yielding government bonds, will be limited to struggling domestic lenders that already have significant holdings and have few options to make profits elsewhere, analysts said.

‘Little Incentive’

“Cross-border and large domestic banks have little incentive to use the money for carry trades because they are worried about the impact of holding sovereign debt on investors,” said Huw van Steenis, head of European bank research at Morgan Stanley in London.

Banks, including HSBC Holdings Plc (HSBA), Deutsche Bank AG (DBK) and Royal Bank of Scotland Group Plc (RBS), have been cutting their holdings of southern European debt this year on concern that the region’s sovereign-debt crisis is spreading.

Euro-area banks need to refinance more than 600 billion euros of debt maturing next year, about three-quarters of which is unsecured, the Bank of England said in its financial stability report this month. That’s 35 percent more than in 2011, the bank said.

“Banks represent about 80 percent of lending to the euro area,” ECB President Mario Draghi told the European Parliament this week. “The banking channel is crucial to the supply of credit.” He predicted banks will experience “very significant funding constraints” for all of 2012.

The ECB will hold a second auction of unlimited three-year cash in February, allowing banks to pre-fund themselves for all of next year and beyond, say analysts.

“Large take-up is an important positive,” said Jernej Omahen, a Goldman Sachs analyst in London. “European banks seem firmly on their way to fully pre-fund all bond maturities for 2012, and possibly 2013, through the ECB.”

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Liam Vaughan in London at lvaughan6@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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