Banks deposit record amount overnight at ECB

FRANKFURT, Germany (AP) ? Banks in the countries that use the euro held a record amount of money overnight at the European Central Bank in a sign of stress in the financial system from the eurozone debt crisis.

The region's central bank said Tuesday that overnight deposits from Monday hit euro481.93 billion ($613.4 billion) ? beating the previous record of euro463.56 billion from the day before.

The high deposits mean banks are keeping spare cash in a safe place at a low interest rate rather than lending it one another on a short-term basis. This move has sparked fears of a further credit crunch across Europe as banks become wary about lending funds for fear they will not be paid back.

The deposits also reflect large amounts of cash put into the banking system by the ECB in its efforts to steady the system. An ECB offer of emergency three-year loans resulted in euro489 billion being taken up by more than 500 banks in late December.

The climate of anxiety means that some of that loaned money ? on which the ECB currently charges 1 percent annual interest ? is washing back into the ECB overnight deposit facility even though it only earns 0.25 percent.

Europe's government debt crisis has put intense pressure on the banking system, because banks typically hold government bonds. Fears that a heavily indebted government may default ? and cause losses on those bonds ? has left many banks viewed as poor credit risks and unable to borrow from any one but the ECB.

Additionally, many banks have bonds coming due in the first months of the year and will need cash for that if they cannot sell new bonds to pay off the old ones.

Meanwhile, political leaders are still working on measures aimed at containing the crisis. Governments have yet to agree on a proposed treaty to toughen limits on future debt, and are trying to raise an additional euro150 billion to backstop financially troubled governments through the International Monetary Fund. Greece is negotiating with bondholders about a 50 percent write-off of their investments, a step aimed at getting the country's heavy debt load down to a sustainable level.

"With sovereign debt uncertainties still unresolved and banks facing heavy bond redemptions in the first months of the year, it is not difficult to understand why banks remain risk-averse and prefer to hoard liquidity," Marco Valli, chief eurozone economist at UniCredit, said in a note to investors.

Associated Press

Source: http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab526d39972d37b3/Article_2012-01-10-EU-European-Central-Bank/id-2d51e2d9c13d43c5bb4ce0ea695e4585

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