Banks deposited a record €412bn (£343bn) with the European Central Bank overnight on Monday, a sum close to the “wall of money” it pumped into Europe‘s banking system a week ago in an attempt to head off a second credit crunch.
The flood of deposits surpassed the previous record of €384bn reached in June 2010, and topped the €347bn put into the ECB “shelter” last Thursday, just before Christmas.
Banks are using the low risk – but low return – ECB facility in preference to lending to other banks. High levels of distrust in inter-bank lending markets could lead to a liquidity freeze of the kind experienced at the beginning of the 2008 crisis.
Last Wednesday, the ECB attempted to lubricate the flow of money between eurozone banks with three-year loans at around 0.75% as fears mounted that one or more eurozone banks might run out of cash. There was also speculation that banks might use the cash to buy up eurozone loans and ease the debt crisis facing some countries. A total of 523 banks took up the offer, applying for loans totalling more than €489bn. It was the largest amount the ECB had ever offered in a single liquidity operation and equivalent to around 5% of eurozone gross domestic product. They received the cash on Friday and now seem to prefer parking it back with the ECB, where it earns only about 0.25%, rather than lend it on to other banks, even though it would earn higher interest rates.