Some of the retail deposits have been invested in bank bonds sold directly to retail clients that pay as much as 5 percent, compared with an average interest rate on deposits of 0.88 percent. Retail investors in Italy own about 63 percent of bank debt, compared with a European average of 48 percent, data compiled by the Bank of Italy and banking association ABI show.
In Portugal, where banks raised the interest rates they pay savers, non-residents have reduced deposits by 19 percent since March 2010.
The eight largest U.S. money-market funds halved their lending to German, French and U.K. banks over the past 12 months and stopped financing Italian and Spanish financial firms, according to data compiled by Bloomberg from investment reports.
A survey by Fitch Ratings showed that U.S. money-market funds reduced their lending to European banks by 20 percent from the end of May through July. The funds cut investments in Spanish and Italian lenders by 97 percent, to German firms by 42 percent and to French ones by 18 percent, Fitch said. The Aug. 22 survey covers almost half the $1.53 trillion assets held by money funds in the U.S.
Relying On ECB
Moody's Investors Service today cut the long-term debt rating one level on Credit Agricole SA and Societe Generale SA, the country's second- and third-largest lenders by assets, citing the euro-region sovereign debt crisis and concerns about "the structural challenges to banks' funding and liquidity profiles." BNP Paribas SA, France's biggest lender, was kept on review for a possible cut. BNP fell 2.5 percent at 10:25 a.m. in Paris trading, while SocGen declined 2.6 percent. Credit Agricole rose 2.5 percent.
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 euros between June and August. Greek and Irish banks each took about 100 billion euros from the ECB in August. Irish lenders also got 56 billion euros from their domestic central bank. Portuguese banks borrowed about 46 billion euros from the ECB, while Spanish banks took 52 billion euros in July.
'Left With Garbage'
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. Lending to the region's banks by the ECB and other central banks is about seven times the capital of the Eurosystem, the consolidated balance sheet of all euro zone central banks.
"If there are sovereign defaults, the ECB will be left with garbage that has been accepted as collateral," said Lachman. "It's putting EU taxpayers' money at risk in a very non-transparent way. But there's no alternative. The ECB is the only game in town."
ECB Defends Actions
William Lelieveldt, a spokesman for the ECB in Frankfurt, declined to comment about the risk to the central bank. ECB President Jean-Claude Trichet has defended his institution's actions. European banks have more collateral that they can place with the ECB in exchange for additional financing if they need it, he said Sept. 8 in Frankfurt.