JUNE 2, 2010, 8:45 A.M. ET.
ECB Overnight Deposit Hits Record High
By NINA KOEPPENFRANKFURT— Euro-zone banks continue parking piles of cash at the European Central Bank amid concern that the region's banking system faces considerable write-downs this year and next.
Euro-zone banks placed a record €316.4 billion ($387.1 billion) in the ECB's ultra-safe overnight deposit facility, ECB data showed Wednesday, bringing back memories of the days following the collapse of U.S. investment bank Lehman Brothers in 2008.
When markets are functioning properly, banks typically use the facility for only a few hundred million euros, because the ECB pays a below-market rate of only 0.25% on the funds. Overnight lending in money markets currently yields 0.33%.
"The increase in the deposit facility to such high level signals an increase in the perception of counterparty risk," said Luca Cazzulani, the deputy head of fixed-income strategy at UniCredit.
An ECB report published Monday, which showed euro-zone banks could suffer an additional €195 billion in write-downs this year and next, further fanned uncertainty.
"The sizable amounts of loan-losses expected in the next couple of years are likely to limit the availability of credit for the entire non-financial sector, creating an additional hurdle for the economic recovery," Citigroup economist Giada Giani said in a note to clients.
Should economic growth turn out to be weaker than currently forecast, then banks would be forced to make even larger loan-loss provisions, the ECB said Monday.
Fears about the health of the region's banks also pushed up euro interbank offered rates--or Euribor rates, at which banks lend funds to each other. The three-month benchmark rate hit 0.704% Wednesday--the highest level since late December 2009. By comparison, the rate stood at 0.634% at the end of March.
Higher Euribor rates imply increased funding costs for banks, which they may pass on to their corporate customers. Economists warn it could put a brake on the euro zone's economic recovery.
Tensions have reemerged despite massive liquidity provisions from the ECB that has even begun to intervene in the euro zone's public and private debt markets to restore investor confidence in debt issued by governments with weak public finance.
The ECB and the 16 national central banks--collectively called the Eurosystem--currently provide about €843 billion in temporary funds to banks in the region.
The bank has also purchased at least €35 billion in bonds under the newly-established Securities Markets Program, plus €55 billion in covered bonds, or bonds issued by banks to refinance loans on commercial or residential mortgages, or loans to the public sector.
"European lenders are under pressure to shrink," said Lena Komileva, head of economics for the Group of Seven leading nations at inter-dealer money broker Tullett Prebon. "Reduced availability of funds and higher costs of borrowing in the real economy, due to more rapid deleveraging in the banking system, will impose austerity onto both public and private balance sheets," Ms. Komileva added.
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