Commercial banks' overnight deposits at the European Central Bank hit a new record high of 464 billion euros, data showed on Monday, and traders said they could hit half a trillion euros by next week.
High deposits indicate banks prefer the safety of the central bank for their funds to higher rates they could get by lending to each other.
Banks are awash with cash after taking an unprecedented 489 billion euros in the ECB's first-ever three-year liquidity operation late last month, and are mulling what to do with the money in the longer term.
The liquidity operation was designed to underpin banks' finances and hopefully repair some confidence in the sector, but the sovereign debt crisis means many institutions still lack enough trust to lend to each other and prefer to stash their money at the ECB.
The market is more or less closed, all the over-liquidity is going back to ECB, the trader said. Slowly people are getting some longer funding, but there is no easing in the short end.
The ECB pays 0.25 percent interest for overnight deposits, well below the 0.357 percent for which banks could lend out their spare cash on interbank markets.
Overnight deposits have a tendency to rise towards the end of the month-long reserves maintenance period, which ends on January 17, when banks have fewer options to juggle their funding as they have to show they have the funds required of them.
Towards the end of reserves period it could go to 500 billion, a euro zone money market trader said.
Emergency overnight borrowing fell to 1.391 billion euros, the lowest since November 7. That eased some concerns about banks scrambling desperately for funds and having to pay an interest rate of 1.75 percent instead of the 1.0 percent the ECB charges in its regular refinancing operations.
Shares and rights in UniCredit
UniCredit has priced its two-for-one rights issue at 1.943 euros per share. This is equivalent to a 43 percent discount to the theoretical ex-rights price, a much higher discount than that offered by peers in recent rights issues, with traders saying the large discount was due to concerns that appetite for new shares could be scant.
That also raised worries that other banks may struggle to raise cash if they need it.
The European Banking Authority has estimated that European banks need an additional 114.7 billion euros of extra capital to reach the new capital standard of core Tier 1 capital adequacy ratio of at least 9 percent of risk-weighted assets.
The 463.565 billion euros in deposits topped the previous record high of 455.299 billion euros reached on Friday. With total ECB lending at 685 billion euros, banks are returning two-thirds of the money back to the central bank.
The ECB is worried that the euro zone could see a credit crunch and has responded by flooding the money market with cheap cash, offering banks unlimited funds in maturities ranging from one week to three years at a rate of 1.0 percent.
French President Nicolas Sarkozy said last month the ECB's increased provision of funds via the ultra-long liquidity operations meant governments in countries like Italy and Spain could look to their countries' banks to buy their bonds, but the high deposits indicate this has not happened yet.
While banks deposited less than 300 billion euros at the ECB in the last two reserves maintenance periods, those deposits still amounted to about two-thirds of ECB-provided liquidity back at the central bank in the last two months, the same as currently.
Before the financial crisis started, banks made scant use of the deposit facility, giving the ECB less than 100 million euros most days.
(Reporting by Sakari Suoninen; Editing by Toby Chopra)