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Last updated: March 5, 2012 3:36 pm
European lenders deposited a record €821bn over the weekend at the European Central Bank after the bank injected a second wave of cheap loans into the eurozone financial system.
The ECB announced last Wednesday that 800 banks had borrowed €529.5bn in the second phase of the programme being offered by the central bank, a move aimed at easing funding pressures on eurozone lenders. In total, lenders have borrowed more than €1tn from the ECB at a rate of 1 per cent under its three-year longer-term refinancing operations (LTRO) in February and December.
ECB overnight deposits rose to €776.9bn overnight on Thursday after the second LTRO. Following December’s cash injection, overnight deposits rose to about €450bn.
Some have suggested that the high level of funds being kept at the ECB is a sign of market tension and shows banks are opting for safety, given that the central bank’s overnight deposit facility only earns an interest rate of 0.25 per cent.
However, analysts point out that it would be impossible for banks to redeploy that level of capital so quickly.
“Even if you had super high velocity of lending between banks, it would take two months before it was visible in the system as an increase in minimum reserve holdings, which would reduce excess liquidity and the use of the deposit facility,” said Jürgen Michels, senior euro area economist at Citi. “At the moment banks simply prefer to deposit their money overnight at a rate of 0.25 per cent rather than leave it in the ECB’s current account at a rate of 0 per cent.”
In further sign of the impact the flood of liquidity is having on bank-to-bank lending, three-month euribor – the benchmark for interbank euro lending rates – is at its lowest in 16 months at 0.934 per cent.
The first phase of the ECB’s three-year loan programme helped boost market sentiment, as banks used the funding to refinance debt. In Italy and Spain, where take-up of the facility was highest, analysts say lenders have also used the LTRO to buy sovereign bonds.
Yields on Italian and Spanish bonds have fallen sharply since the December LTRO. Italian 10-year bonds, which were trading above 7 per cent at the end of last year, a level widely seen as unsustainable, were on Monday at 4.94 per cent.
The ECB, meanwhile, last week bought no sovereign bonds for the third week in a row, adding to speculation that the bank may be winding down its programme to support the bond markets due to the success of the LTRO.
The ECB hopes that some of the money being injected into the banking system will start filtering down to the “real” economy in the form of easier funding for companies. However, so far there has been little evidence of that.
José Manuel González-Páramo, ECB executive board member, said on Monday that there was anecdotal evidence to suggest that banks were using some of the LTRO funds to lend to companies.
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