THE AMOUNT of cash deposited by euro zone banks overnight at the European Central Bank has hit a record, data revealed yesterday – the new high coming a day after financial institutions took advantage of an offer of unlimited cheap loans.
Banks parked €776.9 billion overnight on Thursday in the ECB deposit facility – for which they earn just 0.25 per cent – up by nearly two-thirds or €300 billion from the previous day.
Under the ECB’s longer-term refinancing operation, 800 banks on Wednesday took €529.5 billion of three-year loans at 1 per cent. Stripping out money rolling over from other refinancing operations, analysts estimate about €310 billion of new liquidity was created.
Central bankers play down the significance of any rise in deposits, saying that it is an automatic side effect of the ECB increasing its balance sheet through the long-term refinancing operation (LTRO) and does not show that banks are opting for safety first.
But if the figures were to persist without a rise in bank lending to the real economy, they would underline one of the frustrations of the ECB’s intervention for many policymakers: that banks have either been hoarding the cash or using it to buy securities such as government bonds rather than extending loans to companies.
Use of the ECB deposit facility jumped after the previous LTRO in December, with banks placing about €450 billion, a level they have roughly maintained ever since. Before that figure, the record was €384 billion in June 2010. Use of the ECB’s deposit facility has often been seen as a sign of market tension as banks could earn more in the interbank market but prefer the safety of parking their cash at the central bank. Many analysts downplay its broader significance, saying use of the facility was always likely to rise after the latest LTRO.
However, economists say Italian and Spanish banks have been much more likely to use their LTRO cash to buy government debt than those from countries such as Germany.
The LTRO has been praised by investors and bankers for taking away the prospect of bank failure due to financing problems, especially as the amount of bank debt coming due in the next few years was high by historical standards.
The improved market sentiment that followed December’s LTRO allowed European banks to return to the public bond markets in January after a sluggish end to 2011. However, while there has been a steady stream of senior unsecured debt and covered bond issues by banks over the past two months, some analysts say that there are not enough issues hitting the market to match demand from cash-rich investors. – (FT)
