Eurozone banks deposit funds heavily at ECB

September 07, 2011 | 08:19

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Eurozone banks deposited the biggest amount of overnight funds at the ECB so far this year on Monday, official data showed on Tuesday in a signal that banks are wary of lending to each other.

Eurozone banks put 166.8 billion euros ($234 billion) on deposit for 24 hours at the European Central Bank, against a background of renewed concerns about the eurozone debt crisis.

The previous record for such overnight deposits was on Friday when the amount totalled 151 billion euros.

The level of these deposits at the central bank is an indicator of the reluctance of banks to lend to each other on the pivotal interbank market.

The money deposited at the ECB earns an interest rate of 0.75 per cent, which is less than the rate available on the interbank market.

Banks become reluctant to lend to each other notably when they are concerned about the capacity of the borrower to repay the loan.

When reluctance to lend occurs across the board it can be a signal that banks consider they do not have enough information about the state of the finances of other banks, and particularly about the health of their balance sheets.

There is concern that some banks in the European Union might find themselves in difficulties if the eurozone debt crisis worsens, because they hold large amounts of debt bonds issued by countries under pressure.

The head of the International Monetary Fund Christine Lagarde repeated on Monday a recent warning that European banks in general needed extra capital to protect themselves from risks linked to the debt crisis.

AFP

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