Friday, December 23, 2011

Eurozone banks confirm interbank loan market frozen, ECB deposits reach new 2011 highs

One of the signs of a solvency crisis is when the interbank loan market is frozen.  Banks refuse to lend to each other because they cannot determine if the borrower is solvent or not and if not solvent, whether they will repay the loan or not.

The Wall Street Journal ran an article that showed the Eurozone interbank loan market is frozen and treating it with massive amounts of liquidity is ineffective as the issue is one of solvency.
Use of the European Central Bank's overnight deposit facility reached a new record high for the year Thursday, suggesting recent measures by central banks and policy makers still aren't enough to restore confidence in inter-bank lending markets. 
Banks deposited €346.99 billion ($453.38 billion) in the overnight deposit facility, up from €264.97 billion a day earlier and a previous high for the year of €346.36 billion, reached earlier this month. 
The high level reflects ongoing distrust in inter-bank lending markets, where banks prefer using the ECB facility as a safe haven for excess funds rather than lending them to other banks. 
The high deposit level also suggests markets aren't fully convinced that the ECB's massive long-term loan allotment is enough to fortify the currency bloc's banking sector. 
The central bank extended nearly half a trillion euros in long-term loans to euro-zone banks Wednesday, hoping to ease fears of a new credit crunch as banks struggle to borrow from markets. 
Separate actions in recent weeks by central banks and policy makers have also sought to make dollar loans cheaper for euro-zone banks and to boost fiscal integration in the bloc.... 
The ECB further said banks borrowed €6.34 billion from the ECB's overnight lending facility, compared with €7.55 billion borrowed a day earlier. When markets are functioning properly, banks only use the facility to the tune of a few hundred million euros overnight.

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