The European Central Bank said overnight deposits from financial institutions dropped by more than half to the lowest level in almost seven months after policy makers stopped paying interest for the funds.
Banks in the 17-nation euro region parked 324.9 billion euros ($397.2 billion) at the ECB yesterday, down from 808.5 billion euros the previous day, the Frankfurt-based institution said. That’s the least since Dec. 21.
Financial institutions are no longer remunerated for the money they deposit at the ECB overnight after last week’s interest-rate cuts took effect yesterday. Policy makers reduced the main refinancing rate on July 5 to a record low of 0.75 percent and cut the deposit rate to zero to stimulate credit supply and lending.
“It’s a miracle that banks used the facility at all,” Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt, said in an interview. “Most banks are putting their money into reserve accounts instead. There’s no reason to believe that excess liquidity is declining.”
The ECB has flooded financial markets with more than 1 trillion euros of cheap three-year loans to unlock credit. As a result, overnight deposits, a measure of excess liquidity in the system, surged and have hovered around 800 billion euros until earlier this week.
“I would not make too much of the levels that these deposits are reaching, because it is just a mechanical consequence of the liquidity creation,” ECB President Mario Draghi said on March 8.
ECB Governing Council member Josef Bonnici said today’s decline in overnight deposits is “encouraging.”
With last week’s deposit-rate cut, “the ECB wants to encourage banks to place less money with it,” Bonnici, who is also governor of the central bank of Malta, told reporters in Casablanca, Morocco, today. “The fact that the deposit rate was reduced to zero provides an incentive for banks to see what alternatives there are to increase their earnings. This may lead to greater borrowing especially in some member states.”
Banks, which are remunerated for their reserve accounts with interest equivalent to the main refinancing rate, tend to frontload reserve-building at the ECB. That has in the past resulted in a drop of overnight deposits at the beginning of maintenance periods, a stretch of about a month during which banks are required to hold a certain amount of reserves on average.
“Banks are likely to hit their regulatory reserve requirements very quickly, so the usage of the deposit facility is likely to rise again in the coming days,” Thomas Costerg, an economist at Standard Chartered Bank in London, said in e-mailed comments.