ECB Takes Record Overnight Deposits Stoked by Emergency Lending Operations

The European Central Bank took a record amount of overnight deposits yesterday as the region’s financial institutions entrusted funds amassed from emergency lending operations.

Euro-area banks parked 455.3 billion euros ($582 billion) with the Frankfurt-based ECB, the most since the euro’s introduction in 1999 and up from 443.7 billion euros reported yesterday. Financial institutions borrowed 1.9 billion euros at the central bank’s marginal lending facility.

The ECB last month loaned 523 banks a record 489 billion euros for three years to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis. It loaned the money at its benchmark rate (EURR002W) of 1 percent. The surge in deposits suggests banks are placing excess cash back with the ECB at the overnight rate of 0.25 percent, incurring a loss rather than lending it for more elsewhere.

“This was to be expected,” said Nick Matthews, a senior economist at Royal Bank of Scotland Group Plc in London. “The banks have large amounts of cash after refinancing operations, which they are happy to redeposit with the ECB. Expect the deposit facility usage to increase over the coming days.”

Matthews predicted further record amounts because the ECB’s reserve maintenance period, during which banks are required to hold a certain amount of reserves on average, is drawing to a close on Jan. 17. That can provoke fluctuations in deposits as lenders, who tend to front-load ECB borrowings, seek to balance accounts.

Barclays Capital estimates the three-year loans injected 193 billion euros of new money into the financial system, with 296 billion euros accounted for by maturing loans. Since the three-year loans started on Dec. 22, overnight deposits have jumped by 190 billion euros, suggesting banks are parking almost all additional liquidity back with the ECB.

To contact the reporter on this story: 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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