EU banks deposit record overnight funds with ECB

Siobhan Creaton

December 03 2011 04:44 AM

MOUNTING concern about a possible bank failure in Europe has triggered a surge in the amount of money eurozone banks have deposited at the European Central Bank.

New figures show that banks deposited the highest amount of short-term, or overnight, cash with the ECB so far this year over the past few days.

This shows the banks are wary of lending money to each other in the interbank market because of fears the debt crisis could topple some of Europe's big banks.

Eurozone financial institutions put €313.76bn on deposit for 24 hours at the ECB shortly after the world's leading central banks stepped into the markets to inject calm and ease the pressures in the inter-bank market.

Goodbody economist Dermot O'Leary said it wasn't surprising that the banks were sending their short-term cash to the ECB as the crisis continued.

It's a "confidence issue", he says. "These banks must be willing to deposit cash with other eurozone banks."

The co-ordinated central bank intervention this week reflected fears that there was the potential for some European banks to collapse because of concerns about sovereign debts and funding issues, Mr O'Leary said.

Circuit breaker

The "circuit breaker" that could stop this flow of money to the ECB instead of to the other eurozone banks would be for Europe's central bank to behave more aggressively, Mr O'Leary added. "It could start buying up sovereign bonds. This would reduce the stress in the sovereign bond markets and the ECB can do it because it has unlimited fire power."

The "taboo" about discussions surrounding the exiting of some countries from the euro had also been banished, he said.

But everything hinges on Europe finding a solution at next week's crucial summit.

"Italy and Spain can fund themselves for a few more weeks but I am not sure the banks will be able to cope with that uncertainty," he said. "The threat of a bank run or collapse in Europe is pushing policy responses."

The Irish banks have been strongly recapitalised following stringent stress tests and the level of deposits has not only steadied, but also increased. The risk associated with the future of the euro, though, remains.