Measures that gauge the level of European banks’ reluctance to lend to one another are approaching levels unseen since the aftermath of Lehman Brothers Holdings Inc. (LEHMQ)’s collapse.
Banks in the region are paying the biggest premium to borrow in dollars since December 2008, with the three-month cross currency basis swap falling to 90 basis points below the euro interbank offered rate today. The difference between three-month Euribor and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, jumped to 0.63 percentage points today, the widest spread since May 2009.
ECB President Jean-Claude Trichet last week offered banks unlimited money for six months and extended existing liquidity measures to quell concern that southern European lenders may struggle to borrow in the debt markets. The central bank has also started to purchase Italian and Spanish bonds to stem the sovereign debt crisis.
Banks deposited 145 billion euros ($207 billion U.S.) with the European Central Bank’s overnight facility as of yesterday, the most since August 2010.
"Banks are beginning lend more cautiously, and increasingly park their money at central banks," ECB Governing Council member Ewald Nowotny told Austrian state radio ORF today. "Bank deposits at the ECB have risen massively. That’s not a good sign."
European banks dropped for an eighth consecutive day, with Credit Suisse Group AG falling below the lowest it hit during the financial crisis of 2008. The Bloomberg Europe Banks and Financial Services Index fell 0.6% by 12:45 p.m. (BST) in London, led by Royal Bank of Scotland Group Plc and Credit Suisse. The Swiss lender dropped 5.3 percent in Zurich trading to 21.43 francs, the lowest since March 2003.
The ECB’s purchases of Spanish and Italian bonds may be draining liquidity from the interbank markets, analysts said. Unlike the U.S. Federal Reserve’s quantitative easing program, the ECB sterilizes its bond purchases, using term deposits to reabsorb the same amount of cash it spends.
If the ECB chooses to sterilize its Italian and Spanish bond purchases by holding bank deposits of the same size, that could encourage banks to boost their deposits at the ECB rather than lend to each other, analysts said.
The yield on 10-year Spanish government bonds has fallen 127 basis points in the past week to 4.99% today. The yield on Italian debt of a similar maturity slid 100 basis points to 5.13% in the same period.
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