Banks Park Record Funds with ECB
WSJ: FRANKFURT—European banks parked a record amount of funds at the European Central Bank's overnight deposit facility Tuesday while short-term emergency borrowing from the central bank remained elevated, underscoring persistent nervousness about the health of the region's financial system.
European banks increasingly have turned to the ECB as their cost of long-term funding in the bond markets became prohibitively high last year because of uncertainties surrounding the sovereign debt crisis. At the same time, banks that are awash with cash are hoarding it at the ECB instead of lending to each other in fear of counterparty failure to pay the loans back.
As the debt and banking crisis continues to erode banks' confidence in one another, the ECB has stepped up support for the banks, doling out in December half a trillion euros in three-year loans, in the first of two long-term liquidity operations.
Still, on Tuesday banks parked €453.18 billion ($591 billion) in the ECB's overnight deposit facility, which pays a 0.25% interest rate, up from €446.26 billion Monday, ECB data showed Wednesday. That breaks the all-time record set last week of €452.03 billion. Most analysts said this was a result of banks hoarding their excess funds at the ECB after tapping its first three-year refinancing operation
Meanwhile, banks borrowed just over €15 billion from the ECB's overnight lending facility, which charges a punitive 1.75% interest rate. The level is marginally higher than the €14.825 billion borrowed Monday.
When the interbank market works properly, banks use the lending facility to borrow just a few hundred million euros overnight.
Banks that have been borrowing from the ECB's emergency window, which charges a penalty rate, had a chance to switch to the central bank's regular one-week loan operation on Tuesday for their short-term funding needs. Banks borrowed €130.6 billion in one-week funds on Tuesday. Those loans settled Wednesday, suggesting that use of emergency loans should fall markedly in the data released on Thursday.
But emergency borrowing remains well above normal levels, even as some banks are making plans to issue new bonds this year. Banks still prefer covered bonds—a type of debt considered to be the safest banks sell—rather than issuing senior unsecured debt, which had been their traditional method of financing.
Six European banks have sold covered bonds—serviced with the payments made on a pool of credit assets such as residential mortgages or public-sector loans—in the past two days, as even some of the largest banks remain shut out of the market for more traditional debt. Société Générale estimates banks will sell €185 billion worth of covered bonds in 2012, compared with only €50 billion of senior unsecured bonds.
The ECB is also running its second covered-bond buying program of the crisis in order to help bring down funding costs. As of Jan. 3, the ECB had bought €3.12 billion out of its €40 billion program, which will run through October.
Referring to the new record deposit levels at the ECB, Crédit Agricole analyst Orlando Green said: "There's more cash in the system after the ultra-long [refinancing operation]," but financial institutions are still more inclined to park funds at the ECB than lend to the real economy as banks await clarity on how the euro zone will proceed with its effort to solve the debt crisis.
The overnight reference rate for unsecured lending on the European interbank market, fixed at 0.396% Tuesday night. This means that banks would earn this rate were they to lend it out to other financial institutions. But the high level of deposits at the ECB suggests that banks would rather not take the chance of a counter party failing and are willing to take more modest gains leaving funds with the central bank.
Technical factors are also playing a role in the high deposit level. Banks' reserve maintenance period ends Jan. 17. As the maintenance period nears its end, banks, which tend to have already met reserve requirements, park excess liquidity with the central bank.
While the current high levels of liquidity in the financial system suggest that the level of parked funds at the ECB would rise, uncertainty is also causing financial institutions to leave funds with the central bank, said Christian Schulz at Berenberg Bank.
He said that as long as there remains uncertainty surrounding banks' capital needs and where they can raise new capital, then use of the central bank's deposit facility will remain "extremely elevated."
Banks have until the end of June this year to comply with the European Banking Authority requirement of minimum core capital levels of 9%.
Separately, demand from euro-zone banks for the ECB's dollar liquidity supply fell only slightly Wednesday, as dollar funding shortages persist among euro-zone banks. The ECB allotted a total of $31.667 billion at two dollar liquidity tenders Wednesday, down from $33.004 billion allotted in a two-week dollar swap operation Dec. 21, which is maturing this week.
Banks used Wednesday's dollar offer to switch from the ECB's one-week to the three-month facility.
On Wednesday, 12 banks requested dollar liquidity against ECB-eligible collateral at the one-week operation and 34 banks at the three-month operation. The last time the ECB offered dollars, on Dec. 21, 34 banks tapped the ECB.
For most of 2011, the ECB hardly saw any demand for dollars but dollar liquidity tightened in the second half of last year as a result of rising worries over the euro zone's sovereign credit crisis.
—Art Patnaude in London and Brian Blackstone in Frankfurt contributed to this article.
Write to Todd Buell