Banks show no sign of cutting ECB funding, Euribor rates fall

FRANKFURT: Euro zone bank-to-bank lending rates fell to new 10-month lows on Tuesday, as banks continued to show no sign of cutting back their appetite for ECB funding despite the central bank's recent injection of almost half a trillion euros in 3-year loans.

Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.158 percent from 1.168 percent, the lowest since early March last year.

Longer-term rates also dropped. Six-month rates fell to 1.451 percent from 1.460 percent, while 12-month rates fell to 1.784 percent from 1.793 percent.

To ease banks' funding strains, the European Central Bank pumped 489 billion euros into the system in December in its first-ever offering of 3-year loans.

Despite already being awash with liquidity, banks show no sign of cutting back their intake of ECB funding. At the weekly handout of 7-day cash on Tuesday they took 130 billion euros, up from 126 billion last week and the same as was being taken before looser ECB reserves rules kicked in this month.

The ECB's support measures have seen the amount of spare cash in the banking system balloon - 515 billion euros after hitting a record high of 535 billion euros last week - and put downward pressure on the rates banks charge each other in open markets.

One-week rates - most heavily influenced by excess liquidity - fell to 0.422 percent from 0.429 percent on Monday while overnight rates dropped to 0.371 percent from 0.394 percent.

Money market rates are expected to come under renewed downward pressure in the coming months.

ECB President Mario Draghi said last week he expects "substantial demand" for the ECB's second 3-year loan handout on Feb. 29, while some economists and market experts also believe the bank may hold at least one more operation after that.

With euro zone debt fears still dominating markets banks are currently parking much of the excess funding in the system back at the ECB, however.

Overnight deposits at the ECB hit a record high of 528 billion euros at the peak of the ECB's last reserves period last week and currently stand at a hefty 490 billion euros.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.