Frankfurt - Commercial banks parked almost half a trillion euros at the European Central Bank (ECB), the highest on record, as the mix of debt crisis worries and a recent giant injection of ECB cash left banks awash with money but too scared to lend it.
Overnight deposits at the ECB have regularly hit new records in recent weeks after the central bank’s first-ever offering of three-year loans pumped €490bn ($620bn) into the banking system.
ECB data on Monday showed overnight deposits reached a new high of €493bn, up from the €490bn they had risen to on Friday.
The total could climb further still. The end of the ECB’s monthly reserves cycle - the point when banks have fulfilled their ECB targets and have few options to juggle their funding - is on Tuesday.
Changes to the ECB’s reserves rules, which kick in on Wednesday and will mean banks have to keep less of a cash buffer at the ECB, are raising questions about future deposit levels.
The move will cut banks’ reserves ratio requirements to 1% from 2% and is set to save banks €100bn, according to the ECB.
On one hand that could mean banks - who won’t be able to repay old ECB loans early - may have even more spare cash to deposit. Alternatively, the impact may be minimal if banks react by cutting back on what they take at the ECB’s once-a-week, seven-day funding handouts.
With total ECB lending at €664bn, banks are now storing over 70% of money lent by the ECB at the central bank, compared to around a third after the collapse of Lehman Brothers back in late 2008.
The rise in the headline deposit number was largely expected by money market experts, considering banks’ huge uptake of the three-year funding. While banks deposited less than €300bn at the ECB at the peak of the last two reserve maintenance periods, the proportion - at over 65% - was not much lower than it is as now.
This deep reluctance of banks to lend to one another continues to paralyse money markets and highlights the barriers to achieving any substantial relief in the euro debt crisis.
Before the financial crisis started banks made scant use of the deposit facility, giving the ECB less than €100m on most days.
Last week ECB president Mario Draghi said the ECB’s three-year loans were clearly having a beneficial impact and were finding their way into the real economy as well as helping to calm government and bank bond markets.
While yields fell sharply at Spanish bond auctions last week, the success was not replicated at Italy’s sale of three-year debt on Friday, and S&P’s downgrade of nine eurozone countries has cast fresh clouds.