Monday 18 December 2017

Wary banks park cash in ECB instead of lending to each other

European banks are recycling cash from the European Central Bank (ECB) back to the ECB, because they are too nervous to lend it to other banks.

Figures show they deposited record amounts of cash in the ECB's overnight deposit facility this month. Wednesday's total of more than €320bn beat the previous record of €316bn set a day earlier.

This is more than the sums deposited with the ECB after the collapse of US investment bank Lehman Brothers in September 2008 precipitated the global financial crisis.

Banks earn only 0.25pc interest on excess funds placed with the ECB. But many prefer this to higher rates on the inter-bank market, because of the fears of other banks' exposure to government borrowings, especially in Greece.

"The banking crisis is back," said Norbert Aul, an interest-rate strategist at Commerzbank in London.

"The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it's deemed safer to park cash with the ECB rather than lend it on."

Markets

Money market rates are rising, with the euro interbank offered rate, or Euribor, for three-month loans yesterday increasing to 0.704pc, the highest this year.

Banks borrowed €9m from the ECB at the marginal rate of 1.75pc yesterday.

"There seems to be a lot of excess liquidity in the system, with the ECB buying government bonds from the banks, as part of the Greek rescue plan," said Dermot O'Leary, chief economist at Goodbody Stockbrokers.

"But fears of counterparty risk mean the banks are redepositing the funds rather than lodging them with each other. The same thing seems to be happening with funds from the ECB's regular monthly auction of loans to banks."

Banks normally exchange surplus cash with each other on interbank money markets to help fund regular operations. The new outbreak of fear may also tighten credit, which has fallen consistently in the euro area since the crisis developed.

Irish Independent

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