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European banks borrow from ECB - and then lodge the cash with the ECB again

Overnight deposits at the ECB jumped by €65bn on Monday – potentially undermining ECB efforts to get money moving again.

Image: Michael Probst/AP

NEW FIGURES from the European Central Bank have prompted fears that the bank’s unprecedented package of major loans issued late last year may be undermined by banks simply depositing the cash back with the ECB.

Figures posted by the bank today, relating to lending last night (Tuesday), showed that overnight deposits – money lodged in the bank by European lenders – had reached a new record of €453.181 billion.

This was up by around €65 billion on Monday – and has fuelled suggestions that the ECB’s unusual tactics in trying to get banks to resume lending to each other may have backfired.

In the week before Christmas, the ECB announced it had allowed European banks to avail of cheap loans – which were not due to be paid back for three years, up from one – worth a record €489 billion.

The intention behind this was relatively simple: when they have excess funds, banks ordinarily lend their spare cash to other institutions, charging a reasonable interest rate for doing so.

The ECB had hoped that by giving banks access to extra cash for a reasonably long period, they would be able to start lending to each other once more – but instead, it appears banks may simply be hoarding the cash somewhere they deem to be safer.

This is despite the fact that the ECB’s overnight interest rate for any deposits is around 0.25 per cent a year – much lower than the interest rate that banks themselves are being charged for the three-year loans in the first place.

The difficulty in encouraging banks to lend to each other suggests that the world may have returned to a ‘credit crunch’ similar to that of 2008 – with banks perhaps uneasy about the possibility of other banks having to write down the value of their foreign bonds.

If banks find it difficult to borrow themselves, they are less likely to pass on those loans to businesses or personal customers.

About the author:

Gavan Reilly

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