ECB cuts funding for Greek banks as liquidity improves

ATHENS/FRANKFURT (Reuters) - The European Central Bank cut emergency liquidity assistance (ELA) for Greek banks on Tuesday, in line with a request from Athens, several sources said, a positive sign that lenders are stabilising their operations and building cash reserves.

The ECB cut the ELA ceiling to 89.7 billion euros ($98.96 billion) from around 91 billion euros, reflecting a growing liquidity buffer and increasing confidence after Greece wrapped up negotiations with creditors on a bailout package worth around 85 billion euros last week.

"The ELA cap was lowered, in line with a request by the Bank of Greece, due to improving liquidity conditions," one of the sources told Reuters, speaking on condition of anonymity.

Greece has relied on ELA for months to keep its banks functioning, while also introducing capital controls and limiting cash withdrawals. But banks earlier reported a liquidity buffer of around 5 billion euros, thanks to previous ELA increases, tax and tourism inflows, pension payments and the stabilising effect of capital controls.

International lenders earmarked 25 billion euros in the rescue package to recapitalise Greek banks but lenders will have to wait for fresh equity until after authorities finish a stress test in October and approve business their business plan.

The capital injection, though not immediate, is expected to happen before the end of the year. The ECB is next expected to review Greek ELA at its Sept. 3 regular policy meeting.

Greece is due make a 3.2 billion euro bond payment to the ECB by Aug 20.

($1 = 0.9065 euros)

(Reporting by George Georgiopoulos and Balazs Koranyi; Writing by Karolina Tagaris; Editing by Mark Heinrich)