Banks Increased ECB Overnight Deposits to Highest in Year

The European Central Bank said financial institutions increased overnight deposits with it to the highest in more than a year.

Banks parked 151.1 billion euros ($213 billion) with the Frankfurt-based ECB on Sep. 2, the most since Aug. 9 last year. Banks borrowed 14 million euros from the ECB at the marginal rate of 2.25 percent. The ECB currently lends banks as much cash as they need in its refinancing operations at its benchmark rate of 1.5 percent.

Banks have again started hoarding the excess cash they borrow from the ECB rather than lending it to other institutions as the worsening sovereign debt crisis makes them wary of each other. Banks sometimes front-load their ECB borrowing at the start of the month to ensure they have enough cash to meet reserve maintenance requirements, said Laurent Fransolet, head of European fixed income strategy at Barclays Capital in London.

“The deposits always spike once a month, so while people in general are careful and there are stresses in the market, today’s figure is not a reliable indicator,” he said. “Because of the stresses, banks borrowed early from the ECB, and because they can’t hold excess reserves they park it back with the ECB.”

Rate Meeting

ECB policy makers meet on Sept. 8 to decide on interest rates amid concerns that the debt crisis will infect Europe’s banking system. The costs of insuring European sovereign and financial debt against default surged to records today.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 8 basis points to 318 at 9:30 a.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers soared 13 basis points to 259, according to JPMorgan Chase & Co. (JPM) Both gauges are at all- time highs based on closing prices.

Interbank borrowing for more than six months is becoming problematic because banks are reluctant to lend to competitors with “big positions in weaker countries’ debt,” ABN Amro Group NV Chief Executive Officer Gerrit Zalm, a former Dutch finance minister, said yesterday.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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