Overnight deposits held by banks in the euro area by the European Central Bank (ECB) reached a new record of 777 billion euros on Friday, just two days after the ECB lent out 530 billion euros, according to the Financial Times. Banks placed 776.9 billion euros overnight at the ECB on Thursday, about two thirds more than the previous day, choosing to keep the money safe at the ECB instead of investing money in the market immediately.
Through the ECB’s unlimited cash program for three years, 800 banks borrowed 529.5 billion euros this week at 1% interest. To keep the money in the ECB overnight deposits, commercial banks only receive interest at 0.25%.
Representatives from central banks explain the strong increase of deposits as an automatic consequence of liquidity introduced by the ECB in the financial system. If the situation persists without an increase in lending to the real economy, it will highlight one of the frustrations of many European leaders: that banks accumulate cash or invest it in financial instruments such as government bonds.
The use of ECB overnight deposit facility rose sharply after the three-year loan program conducted in December. In last month of 2011, the overnight deposit was about 450 billion and remained at this level later. Keeping money in the ECB is considered a sign of tensions in the banking market, as banks would get more interest if they could borrow between them on the interbank market, as opposed to the interest of only 0.25% they get from the ECB.
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