Nervous Eurozone banks park even more funds with ECB

The Telegraph reports that Eurozone banks parked a record amount of funds with the ECB in a further sign that the banks are becoming increasingly wary of lending to each other.

Regular readers know that this is a direct result of inadequate disclosure by the banks.

Every bank knows that their competitors have exposure to troubled assets.  What they do not know is exactly what this exposure is and therefore they have no way to assess the riskiness or solvency of their competitors.

If banks were required to provide ultra transparency they would disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  This data could be used by their competitors to assess their riskiness and solvency.

Based on this assessment, competitors could adjust the amount and pricing of their exposure to each bank.  For some banks that are currently unable to access interbank loans, the market would reopen.

The record amount was deposited just a week after the ECB lent 523 eurozone banks a total of €489bn in cheap loans in an attempt to keep credit flowing through the economy and prevent a full-scale credit crunch. 

Banks borrowed the money at the ECB's benchmark rate of 1pc, but receive an overnight rate of just 0.25pc, well below what they could earn in wholesale markets. 

This means lenders are depositing any new cash back with the ECB at a loss in order to guarantee safety. 

This takes Mark Twain's observation about being concerned about the return of his principal and not on his principal to an extreme.

It is a clear sign that confidence in the Eurozone banking system is disappearing.

Banks will also be searching for safe havens in an attempt to reduce their risk profile for end-of-year accounts, as was seen during the end of 2008. 

Please note that banks are aware of end of year window dressing and how it is used to "hide" the real risk of the bank.

One reason that ultra transparency is provided on an on-going basis is to remove the practice of window dressing to minimize the perception of risk.