Euribor rates slump as liquidity hits record high

FRANKFURT, Jan 19 (Reuters) - Euro zone bank-to-bank
lending rates fell to new 10-month lows on Thursday, as the
European Central Bank's recent injection of almost half a
trillion euros in 3-year loans and looser new cash buffer rules
sent excess liquidity levels soaring.
The ECB kept interest rates at 1.0 percent last week after
its first-ever offering of 3-year loans pumped 489 billion euros
into the banking system.
The huge injection has seen the amount of spare cash in the
banking system balloon and put heavy downward pressure on the
rates banks charge each other in open markets.
New looser ECB rules which will allow banks to keep less of
a cash buffer at the central bank have also now kicked in.
The move has freed up around 100 billion euros for banks
overall and on Thursday the changes sent the level of excess
cash in the system soaring to a new record high of 535 billion
euros accoring to Reuters calculations.
In response, 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 1.195 percent, the lowest since late March last
year, from 1.204 percent the previous day.
Longer-term rates also dropped. Six-month rates
fell to 1.480 percent from 1.486 percent, while
12-month rates fell to 1.812 percent from 1.818
percent.
One-week rates - most heavily influenced by
excess liquidity, fell to 0.440 percent from 0.448 percent.
With the new ECB's reserves period now underway and giving
banks more options to juggle their funding, overnight rates
bucked the trend, edging up to 0.391 percent from 0.379
percent the previous day.
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 after that.
Despite being awash with liquidity, ongoing crisis worries
mean euro zone banks currently prefer to park their excess funds
overnight at the ECB rather than lending it on in the open
market for higher returns.
The central bank has reinstated some of its most potent
crisis fighting tools over the last six months as the euro zone
debt troubles have intensified, usings
Overnight deposits at the ECB hit a record high of 528
billion euros at the peak of the ECB's last reserves period this
week, effectively cancelling out the near half a trillion euros
pumped into the system by its 3-year loans last month.
Deposits dropped to just under 400 billion euros on Thursday
reflecting the greater degree of freedom banks have at the start
of the monthly ECB reserves cycle.

Euribor rates are fixed daily by the Banking Federation of
the European Union (FBE) shortly after 1000 GMT.
* For a table of the latest Euribor fixings for terms of one
week to one year, double click on
* For a table of the previous day's fixings of EONIA swap
rates, which show market expectations for future overnight
lending rates, double click on
* For graphs of historic Euribor and EONIA swap rates, right
click on the links in angle brackets below, and select 'Related
Graph'
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