Eurozone banks park record cash with ECB

Eurozone banks have parked huge amounts with the European Central Bank (ECB), raising cash deposits with the ECB to a new record as banks used the ECB's latest huge liquidity injection to build up reserves rather than take on new risks, official data showed on Tuesday.

The ECB reported record cash deposits of €412 billion ($539 billion) beating the previous June 2010 record of €384 billion.

The rising usage of the ECB deposit facility since the summer reflects nervousness among Europe's banks about lending money to each other.

In its first-ever 36-month refinancing operation, the ECB lent €489.2 billion ($641 billion) to 523 banks for three years at just 1.0 per cent, a move which, the European Systemic Risk Board said, would ease funding pressures on banks.

Eurozone banks are expected to have used the loan taken from ECB to buy eurozone sovereign bonds.
 
The money deposited with the ECB earns a lower interest of 0.25 per cent, much lower than the rate available on the inter-bank market, which reflected banks' concern over the capacity of borrowers to repay loans.

Eurozone banks have used some €200 million to repay existing debts while the rest has gone into cash accounts, including the deposit facility.

The fact that euro-zone banks are borrowing from the ECB at 1 per cent and parking more and more cash with the ECB at a low interest of 0.25 per cent, shows banks prefer a safe deposit facility over putting it into circulation in the real economy or the euro-zone debt markets.

The trend of using deposit facility is conservatively seen as a display of increasing tensions in a banking system shaken by the euro zone debt crisis, but the latest surge probably does not reflect any deterioration in the situation since last week.