Banks slash ECB overnight deposits, but sit on cash

Thu Jul 12, 2012 9:24am EDT
 
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By Marc Jones and Sakari Suoninen

FRANKFURT/CASABLANCA, Morocco (Reuters) - Banks slashed the amount of money they parked at the European Central Bank after it stopped paying interest on overnight deposits on Wednesday, but there was no sign they were using it to lend more or buy the bonds of crisis-hit euro zone states.

The unprecedented cut in deposit rates to zero - approved last week - means banks now get nothing for parking cash at the ECB and officials hope that will nurture more interbank lending by encouraging lenders to look for more profitable options.

ECB policymaker Josef Bonnici said the plunge in overnight deposits - to 325 billion euros from more than 800 billion a day earlier - was "encouraging" and said he expected to see a rise in loans to firms and consumers as a result.

But ECB President Mario Draghi has said he expects little impact on what banks and other investors do with their spare cash. Thursday's data showed that banks simply shifted much of the near half a trillion euros they took out of the ECB deposit facility into their current accounts at the central bank.

"It's just a shifting of cash from one place to another and ultimately it's a zero sum game," said Simon Peck, rate strategist at RBS.

The current account facility -- which also gives no return but in some respects is easier to use -- jumped to 540 billion from 74 billion the previous day, almost precisely mirroring the change in the overnight figures.

What banks do with the cash from there hangs in the balance but analysts were not optimistic it would lead to a surge in loans.

"Liquidity will remain ample but will be stuck in the current account," said Patrick Jacq, European rate strategist at BNP Paribas in Paris.   Continued...

 
A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012. REUTERS/Alex Domanski