Eurozone banks have deposited record amounts of cash at the European Central Bank, just days after it provided unprecedented levels of liquidity in an effort to reduce tension in the financial system.
Banks placed almost 412 billion euros ($539bn) over the Christmas holiday in the ECB’s deposit facility, which attracts a low rate of interest and in normal times is typically used by banks only to park excess cash, often at a loss.
The record use of the overnight facility comes after more than 520 banks borrowed 489 billion euros from the ECB last week under a new three-year liquidity scheme, suggesting that much of the funding provided by the central bank has yet to be put to use by banks, analysts said. But they also cautioned that it was too early to judge the success of the ECB’s action in granting the loans, its largest single liquidity operation, at a time of thin holiday trading.
The previous record for use of the ECB deposit facility was 384 billion euros in June 2010. The facility’s popularity has fluctuated through the financial crisis but any large increases have often been seen as evidence of market tension — suggesting that banks favour the safety of an ECB deposit over higher returns in the interbank market. Inter-bank lending volumes have slumped in recent months.
The ECB deposit facility attracts an interest rate of just 0.25 percent, compared with the 1 percent rate at which the ECB initially granted its three-year loans. Market observers agree that the liquidity injection has cut the risk of a European bank failure but point out that banks — and their customers — may still feel insufficiently confident to increase the supply of credit. “Despite the massive three year [liquidity take-up], bank concerns on the system remain high given the major sovereign uncertainties,” said Huw van Steenis, banks analyst at Morgan Stanley.
Heavy use of the ECB’s overnight facility into the new year would show that the central bank was failing in its aim of freeing up bank balance sheets.
A test of appetite for European sovereign debt will take place today when Italy auctions9 billion euros of 6-month bills and 2.5 billion euros of two-year bonds. Rome also plans an auction of between 5 billion euros and 8 billion euros of bonds on Thursday. Some analysts fear banks may choose to keep their funds with the ECB rather than invest in Italian paper.