ECB Soaks Up $250 Billion as Loan Levels Lag
By NINA KOEPPEN
FRANKFURT -- The European Central Bank on Tuesday drained €169.68 billion ($250.82 billion) in overnight funds from the money market amid signs that the ample liquidity it has provided to banks isn't fully flowing into the economy.
The ECB mopped up excess reserves held by banks in a special fine-tuning operation, paying them 0.8%, which was above the overnight interbank interest rate of 0.5%.
The central bank slashed interest rates and pumped huge amounts of extra funds into the banking system -- in return for adequate collateral -- after the liquidity shortage that followed the collapse of U.S. investment bank Lehman Brothers last fall.
While those actions have helped keep banks afloat, the money hasn't been fully passed on to the wider economy, analysts say.
ECB President Jean-Claude Trichet last Thursday chided banks in the 16-country euro bloc for failing to pass on more liquidity to households and businesses.
Data released Tuesday showed that liquidity remains abundant. On Monday, banks parked €147.218 billion overnight with the ECB at a below-market rate of 0.25%, rather than lend it out elsewhere at higher rates.
The unsecured segment of the market, where lending isn't collateralized but based on the strength of counterparties' credit ratings, has been hit particularly hard. Banks have shied away from lending as they worried borrowers might default.
"There is a clear dichotomy emerging in the euro zone's financial system, with more-solid institutions regaining access to other providers of liquidity like money-market funds, and others left with the ECB as their one and only source of funding," said Marco Annunziata, chief economist at UniCredit Group.