Banks’ Funding Costs Drop to Record Low as ECB Deposits Plunge

Banks’ short-term funding costs fell to record lows as the European Central Bank said overnight deposits from financial firms plunged after policy makers stopped paying interest on the funds.

An estimate of average overnight borrowing costs in euros over the next three months, the Eonia OIS swap, fell to as low as 9.5 basis points from 11.1 basis points yesterday, according to data compiled by Bloomberg. The three-month euro overnight indexed average, or Eonia, dropped nine basis points to a record low at 13 basis points yesterday.

Banks reduced deposits at the ECB to the lowest in seven months after the central bank’s deposit rate cut announced on July 5 took effect yesterday. The ECB lowered the main refinancing rate to a record low of 0.75 percent and reduced the deposit rate to zero to stimulate credit supply and lending.

“It’s purely technical,” said Lars Tranberg Rasmussen, a euro-region economist at Danske Bank A/S in Copenhagen. “The Eonia rate fixing drops because the deposit rate has been cut. One of the biggest misconceptions in the market right now is that the fall in bank deposits will spur interbank lending.”

The deposit rate has steered overnight market borrowing costs since the ECB started to provide banks with unlimited liquidity as part of its efforts to prevent a credit crunch.

Three-month Eonia will fall further to around 10 basis points, Rasmussen said. Eonia is a weighted average of overnight unsecured lending transactions, derived from a survey by the European Banking Federation.

Deposit Alternatives

Three-month Euribor fell to a record low 0.497 percent from 0.512 percent yesterday. Euribor is the rate banks say they see each other lending in euros, according to the same panel of banks as contribute to Eonia.

Banks in the 17-nation euro region placed 325 billion euros ($397 billion) with the ECB from 809 billion euros the day before. ECB Governing Council member Josef Bonnici said the drop in deposits is “encouraging” and that banks should “see what alternatives there are to increase their earnings.”

The London interbank offered rate, or Libor, for three-month dollar loans was 0.455 percent from 0.466 percent yesterday, the lowest since Nov. 10. Libor for three-month loans in pounds was 0.841 percent from 0.852 yesterday. The measure is the lowest since Aug. 8.

Libor, which acts as a benchmark for about $360 trillion of financial instruments worldwide, is published by the British Bankers’ Association.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE