BANKS' use of the European Central Bank as a safe haven for deposits and a provider of last resort liquidity soared to record highs this week as tension in the financial markets showed no signs of abating.
Data from Frankfurt shows 197 banks drew close to €300m in seven-day ECB funding yesterday -- a level of demand not seen since the height of the crisis in June 2009. Irish banks are believed to have been among the borrowers.
The ECB's filings also show that the amount of cash banks stashed at the ECB overnight soared to a 2011 high of €346.3bn on Monday, up marginally from the €334.9bn level touched last Friday.
The high levels of borrowing and the high deposits are both seen as signs of the dysfunctional financial markets. Banks are putting money on deposit with the ECB because they're scared to lend it to each other, and they're borrowing money from the ECB because they're unable to tap interbank funding markets.
Record use of the ECB facilities comes just days after the central bank launched an unprecedented bid to flood banks with liquidity and prevent another credit crunch by offering three-year money and relaxing collateral rules.
The effort was largely overshadowed by the ECB's steadfast refusal to commit to help weak eurozone states by buying their bonds.
Yesterday, Benoit Coeure, France's candidate for a seat on the ECB's executive board, said the ECB "should do more" if "there is a deterioration in the terms of the transmission of monetary policy".
"The ECB certainly has to keep its eyes peeled" for market developments and "should be ready to adapt," he added, speaking before the European Parliament's economic monetary affairs committee.
The Bank of Canada's governor, Mark Carney, also hinted at the need for the ECB to do more, saying that while he "welcomed" the moves taken last week he was "not under any illusions that they are sufficient to ultimately ensure that European monetary union fully functions, or functions as efficiently as it could".
Meanwhile, the fallout from the Thursday night Europe-wide banking stress tests results continued yesterday, as banks digested the European Bank Authority (EBA) demand that they raise €115bn in capital -- some €8bn more than a figure announced weeks earlier.
Yesterday, Italy's Banking Association stepped up its campaign against demands made on its members by threatening legal action against the EBA's requirements.
"The European Banking Authority measures are a great mistake that may cause a credit crunch and hurt the economy," the association's chairman, Giuseppe Mussari, told reporters in Rome.
"We will use all instruments available under the Italian and European law to oppose them."
Italy's five largest lenders have been ordered to raise some €15.4bn in capital, with plans due to be presented to the EBA for January 20.
Meanwhile, reports of EBA-inspired nationalisations continued, with Portuguese banks and Germany's Commerzbank expected to have to resort to state handouts to meet their targets. (Additional reporting, Reuters)