ECB Says Banks Increased Overnight Deposits to All-Time High

The European Central Bank said overnight deposits from the region’s financial institutions increased to an all-time high.

Euro-area banks parked 452 billion euros ($591 billion) with the Frankfurt-based ECB yesterday, the most since the euro’s introduction in 1999 and up from the previous record of 412 billion euros a day earlier.

The ECB last week lent 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 lent the money at its benchmark rate of 1 percent. Banks are depositing 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 is entirely as expected,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The ECB has taken over the intermediary role because the interbank market has seized up, and the size of the deposits mirrors the refinancing operations. While there may be a seasonal element now as well, it’s going to stay very high as there is simply more cash in the system.”

Barclays Capital estimates the three-year loans injected 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. Since the three-year loans started on Dec. 22, overnight deposits have jumped by 187 billion euros, suggesting banks are parking almost all the additional liquidity back with the ECB.

Aline Schuiling, a senior economist at ABN Amro NV in Amsterdam, warned yesterday about reading too much into the rush of deposits as some financial institutions are closed in the final week of the year and market activity is muted.

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