Banks Stash Money With European Central Bank

FRANKFURT, Germany -- Banks from the 17 countries that use the euro stashed euro347 billion ($453 billion) overnight with the European Central Bank on Thursday, in another sign that Europe's debt crisis is still putting pressure on the banking system.

The figure announced Friday is the highest for 2011, topping euro346.4 billion earlier this month.
Banks use the deposit facility every day in fluctuating amounts to offload excess cash. Heavy recent use suggests that even as the ECB makes more credit available to banks they are depositing some of it -- temporarily at least -- back with the central bank at low interest rates rather than lending.

One reason to park money in the facility is that banks are unwilling to lend to other banks for fear they won't be paid back.

Europe is suffering from a debt crisis marked by concerns that heavily indebted governments such as Italy may be unable to pay off their bonds. That means trouble for banks because they typically hold government bonds.

The large deposits follows Wednesday's massive central bank credit operation, in which the ECB let banks borrow as much as they wanted for up to 3 years. The credit offer was part of a package of bank support measures announced Dec. 8. As a result 523 banks took euro489 billion, the largest ECB loan operation in the 13-year history of the euro. Another three-year credit offering will be held Feb. 28.

The European Central bank has stepped up lending to banks to help them get through the crisis. Some of the banks are finding it extremely difficult to raise money elsewhedisorderly default not agreed in advance.

A top ECB policymaker said in an interview published Friday that the central bank could use its power to create new money to buy financial assets if a deteriorating economy threatens the eurozone with deflation -- falling prices.

Lorenzo Bini Smaghi, who is leaving office next week, was quoted by the Financial Times as saying he saw "no reason" why the bank could not use the technique, called quantitative easing by economists. Both the U.S. Federal Reserve and the Bank of England have used it after lowering interest rates to record low levels and finding that their economies still needed more stimulus.

The ECB's mandate is to provide price stability, so fighting deflation could be consistent with that. At the moment, however, inflation is running at 3.0 percent, well above the ECB's goals of just under 2 percent.