OVERNIGHT DEPOSITS with the European Central Bank (ECB) have surged to a five-month high, suggesting banks are hoarding much of last week’s massive injection of ECB 12-month funds.
Commercial banks deposited €236.2 billion with the ECB on June 26th, the highest level since since January 19th.
The Frankfurt-based ECB last Wednesday lent €442 billion to European banks at its benchmark rate of 1 per cent, doubling the liquidity in the banking system to €897 billion.
The ECB hopes commercial banks will lend the funds on to companies and consumers, which would stimulate spending.
However, after flooding the money market with a record amount of funds, the ECB is now grappling with the most difficult part of its operation: making sure the money fuels economic growth.
ECB executive board member Lorenzo Bini Smaghi and governing council member Axel Weber both told banks last week that they should toe the line after the fund injection.
“Now they have to pass it on to the real economy, make loans to firms,” Mr Bini Smaghi said.
“It will be up to the relevant authorities to ensure that they do.”
Mr Weber said that, if central banks’ efforts to kick-start the economy failed because commercial banks were too cautious in lending, central banks could bypass the commercial banks and take more direct measures.
“I assume that a credit crunch is avoidable, if banks co-operate,” he said. Mr Weber did not spell out what action the ECB might take if banks did not co-operate. But one option would be for the ECB to lend directly to companies, as the US Federal Reserve and the Bank of England are doing.
Mr Weber said he saw no need for fresh action “for the moment”.
UniCredit economist Aurelio Maccario said the ECB’s jawboning made sense: “Moral persuasion is an important tool in times like these and banks know that the ECB support has been decisive for them.
“It’s a matter of finding an equilibrium between the need to keep the credit flowing and avoid banks embarking on too-risky loans that will result in large losses in years to come.”
Irish stockbroking firm Bloxhams predicted yesterday that ECB president Jean-Claude Trichet will “talk tough with banks” at tomorrow’s monthly ECB monetary policy press conference. – (Additional reporting Reuters and Bloomberg)
