Eurozone banks park huge amount of funds at ECB

23rd December 2011, Comments 0 comments

Eurozone banks deposited the biggest amount of overnight funds at the ECB for more than a year on Thursday, official data showed Friday in a fresh sign of banks' wariness of lending to each other.

Banks put 347 billion euros ($453 billion) on deposit for 24 hours at the European Central Bank, the highest amount since June 2010.

The level of deposits at the ECB bank is an indicator of the reluctance of banks to lend to each other on the pivotal interbank market.

The money deposited earns an interest rate of 0.25 percent, which is less than the rate available on the interbank market.

Banks become reluctant to lend to each other notably when they are concerned about the capacity of the borrower to repay the loan.

On Wednesday, some 523 banks borrowed a record 489.2 billion euros from the ECB in a brand-new three-year lending facility, a move which the European Systemic Risk Board said would ease funding pressures on banks.

The ECB agreed to make the cash available so as to avert a possible credit crunch, charging just 1.0 percent interest.

But the deposit data suggest the banks are now simply parking the cash with the ECB.

"Rather than making loans to the wider economy or buying governments bonds -- as some hoped the banks would do -- they are just putting money on deposit in case they need it in the future," said Jennifer McKeown at Capital Economics.

"It's a time issue. I wouldn't draw too much from it unless it's sustained. It's just an indication that there are continued tensions in the banking sector," she said.

© 2011 AFP

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