Banks Hoard Cash Amidst Lending Fears

24 August 2011 - Which Way to Pay

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Banks Hoard Cash Amidst Lending Fears

The European Central Bank (ECB) raised concerned that they are increasingly reluctant to lend in light of data showing a spike in the amount of cash deposited by commercial banks last week.

The data released from ECB showed that commercial banks placed €107.2bn in the central bank's deposit facility on Friday, a figure up from the €90.5bn parked in the bank on Thursday.

Current cash deposits remain below the year-high figure of €145.2bn reached in early August; however the increase is nonetheless a substantial amount for banks to deposit at a rate of 0.75%. At this deposit rate, banks forgo earnings rather than lend it to other banks at the current going interest rate of around 0.89%.

Brown Brothers Harriman strategist, Lena Kormileva commented that "the ECB's intermediation (in the money markets) remains broken”. Furthering this, she argued that “banks are hoarding cash due to systemic risks," which are expected to grow further.

Earlier this month, the ECB launched a six-month loan operation in a radical move that saw 114 eurozone banks apply for funding. In total, €49.8bn was requested to pump into interbank lending markets. However, it is debatable whether increasing lending will ease European fiscal markets because of the risk of inability to make repayments.

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