Bloomberg: Risk piling up at ECB as European banks lose deposits

14 September 2011

European banks are losing deposits as savers and money funds spooked by the region's debt crisis search for havens, a trend that could worsen economic and financial conditions.

Deposits by financial institutions in Greek banks, which make up 21 per cent of the total, have fallen by one-third since the beginning of 2010, while those by non-financial firms and residents dropped 9 per cent, according to Bank of Greece data. In Germany, deposits by financial institutions, which account for one-third of the total, declined 12 per cent over the same period, and 24 per cent since the September 2008 collapse of Lehman Brothers Holdings Inc., ECB figures show. In France, where the erosion started last year, the same type of deposits, which make up half the total, are down 6 per cent since June 2010. They have fallen 14 per cent since May 2010 at Spanish banks, where they account for one-fifth of the total.

To make up the deficit, firms are leaning on the ECB for short-term funding. Borrowing by Italian lenders from the central bank more than doubled to €85 billion between June and August. Greek and Irish banks each took about €100 billion from the ECB in August. Irish lenders also got €56 billion from their domestic central bank. By accepting those countries’ bonds as collateral in exchange for funds, the ECB is piling up risk, said Desmond Lachman, a fellow at the American Enterprise Institute in Washington. In the event of a default, the ECB’s losses would be borne by the EU’s Member States. "If there are sovereign defaults, the ECB will be left with garbage that has been accepted as collateral”, he commented. “It’s putting EU taxpayers’ money at risk in a very non-transparent way. But there’s no alternative.”

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