Banks took a huge 489 billion euros (409 billion pounds) at the European Central Bank's first ever offering of 3-year funding on Wednesday, providing hope a credit crunch can be avoided and that the money may be used to buy Italian and Spanish debt.
A total of 523 banks borrowed money at the tender with the final demand well above the 310 billion euros expected by traders polled by Reuters in the run-up to the operation.
The euro rose to a one-week high versus the dollar while stocks gained after the ECB's three-year lending operation produced a greater takeup than market participants had been expecting, boosting risk appetite.
The three-year loans are the ECB's latest bold attempt to ease the euro zone's current troubles.
It hopes the limit-free, ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and tempting banks to buy Italian and Spanish debt.
Rather than a simple flat rate, the 3-year funds were offered at an interest rate which will be the average of ECB's main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, currently at a record low of 1.0 percent.
For some banks the money could be more than 3 percentage points cheaper than they can get on the open market. As part of the deal they could switch money borrowed from the ECB back in October into three-year funding and will also be able to pay it back after just a year if they so wish.
Another factor boosting demand is that banks are now more reliant than ever on central bank funds. The ECB on Monday said, in its semi-annual Financial Stability Review, that this dependency could be difficult to cure.
French banks have almost quadrupled their intake of ECB money since June to 150 billion euros, while banks in Italy and Spain are each taking more than 100 billion euros.
ECB President Mario Draghi has been pressing banks to take the money since announcing the plans earlier this month. He warned of a chance of a credit crunch on Monday and said that euro zone bond market pressure could rise to unprecedented levels early next year.
Banks switched 45.7 billion euros out of one-year loans taken from the ECB. The impact on overall liquidity levels was also softened after banks scaled down their three-month borrowing from the ECB to 30 billion euros from 140 billion and almost halved their intake of one-week loans this week.
(Reporting by Marc Jones)