December 27, 2011
Just before Christmas, the European Central Bank flooded the financial markets with 500 billion euros -- a move that may not ultimately have the desired effect of stabilizing banks. Instead of passing that money on in loans to businesses to spur the economy, European banks have redeposited the money with the ECB at low interest rates.
The sum of overnight deposits at the European Central Bank (ECB) is often considered to be an indicator of the level of fear brewing within the financial sector. The greater the degree of distrust between banks, the more money banks tend to deposit on a daily basis with the ECB, where interest rates are low, but deposits more secure. This week has seen the level of deposits at the ECB's overnight facility rise to close to €412 billion ($538.4 billion) -- the greatest amount seen since the euro's introduction, and representing a single overnight increase on Monday of €65 billion.
The previous record had been reached in the summer of 2010, when banks parked around €385 billion at the ECB.
Normally banks tend to lend any excess funds to each other. By doing so, they can make more money -- especially given that interest rates at banks are currently twice as high as those offered by the ECB. But the interbank market has been disrupted for weeks now, prompting concerns that the credit crunch last seen after the collapse of Lehman Brothers has returned. European banks no longer trust each other because it is unclear to what extent individual banks are exposed to government bonds from countries hit by the debt crisis, and whether those institutions are in jeopardy. Instead, they are turning to the ECB as a safe haven for their money.
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