Europe: When $625 Billion Just Isn't Enough

Banks are hoarding rather than lending out the European Central Bank’s record €489 billion ($625 billion) injection into the banking system, thwarting attempts by policymakers to avert a credit crunch in the region. Almost all the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank, ECB data show. Barclays Capital estimates firms used €296 billion of the Dec. 21 three-year loans to pay off shorter-term loans from the ECB that were maturing. That left €193 billion of money for the financial system. Overnight deposits with the ECB have jumped by more than €260 billion since the loans, reaching a record half-trillion euros in mid-January, suggesting the funds haven’t so far reached customers.

European officials want banks to keep lending to companies and individuals. They also have imposed rules that require banks to raise an additional €114.7 billion of core capital—common stock and retained earnings—by June to help them weather the deepening sovereign debt crisis. While banks could meet the new requirements by selling more stock to investors, they can also comply by shrinking the amount of loans they have outstanding.