(Bloomberg News) 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.
Retail and institutional deposits at Greek banks fell 19 percent in the past year and almost 40 percent at Irish lenders in 18 months. Meanwhile, European Union financial firms are lending less to one another and U.S. money-market funds have reduced their investments in German, French and Spanish banks.
While the European Central Bank has picked up some of the slack, providing about 500 billion euros ($685 billion) of temporary financing, banks are cutting lending, which could slow growth in their home countries. They're also paying more to keep and attract deposits -- or, in the case of Italy, selling bonds to retail customers for five times the interest they offer on savings accounts -- which will erode profitability.
"All of this is symptomatic of a lot of fear in the European financial sector," said Kash Mansori, senior economist at Experis Finance in Charlotte, North Carolina, which advises U.S. and European companies. "It shows that even European banks don't trust each other anymore, so they're taking their money out of the EU system. It's similar to the distrust that happened worldwide in 2008."
Deposit Erosion
Deposits by financial institutions in Greek banks, which make up 21 percent of the total, have fallen by one-third since the beginning of 2010, while those by non-financial firms and residents dropped 9 percent, according to Bank of Greece data.
In Germany, deposits by financial institutions, which account for one-third the total, declined 12 percent over the same period and 24 percent 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 percent since June 2010. They have fallen 14 percent since May 2010 at Spanish banks, where they account for one-fifth of the total.
Deposits include money kept in banks by individuals and companies. Most of the short-term funding supplied by financial institutions and money funds is counted as deposits by the ECB and other central banks in Europe.
While retail deposits at Italian banks have fallen only 1 percent in the past year, the outflow of money from financial institutions has exceeded $100 billion, a 13 percent decline, according to Bank of Italy and ECB data.
Money-Fund Withdrawal