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FRANKFURT/LONDON, Jan 13 (Reuters) - Euro-priced interbank rates hit new 9-1/2 month lows on Friday driven by the excess cash in the banking system but banks worried about lending to their peers are still parking record amounts of cash with the ECB.
News in the European afternoon that credit rating agency Standard & Poor's was set to downgrade several euro zone countries kept markets on edge.
Commercial banks deposited a record high of 490 billion euros at the ECB overnight facility, figures showed on Friday, effectively cancelling out the near half a trillion euros pumped into the system by the central bank's 3-year loans last month.
With total ECB lending at 664 billion euros, banks are now returning over 70 percent of these funds to the ECB, compared with around a third after the collapse of Lehman Brothers back in late 2008.
Overnight deposits traditionally rise towards the end of the ECB's month-long reserves maintenance period, which this time ends on Jan. 17. As banks have typically already hit their ECB reserves target at the end of the period, they have fewer options to juggle their funding.
Deposits may rise even further from the beginning of the next reserve maintenance period on Jan. 18 when the ECB will cut the amount of reserves banks are required to park with it.
The move, which will reduce the reserves ratio from 2 to 1 percent, is one of a swathe of support measures the ECB announced last month and one it calculates will free up around 100 billion euros for banks.
But interbank lending remains in the doldrums, with most activity confined to top-tier banks with signs that the debt crisis is far from being resolved keeping most market participants cautious.
"We're off to a positive start with the liquidity but we're not seeing any pickup of activity in unsecured lending and it's going to take a lot of time before we see any significant lending activity," a money market trader said.
Highlighting the dislocation still plaguing markets, a member of Germany's Bundesbank was quoted as saying the risk of a credit freeze in debt-strained euro zone countries and some places in eastern Europe was still markedly high. Andreas Dombret also said German banks were "somewhat reluctant" to grant new loans.
His views closely mirrored those of ECB President Mario Draghi who said on Thursday that while lending data suggested there was no euro zone-wide credit drought, there was clear evidence it was drying up in parts of the bloc.
Draghi added the central bank's three-year loans had helped avoid a more dramatic credit crunch and improved banks' funding conditions.
Indeed, interbank lending rates have fallen to 9-1/2 month lows in recent weeks.
On Friday, 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 1.231 percent from 1.245 percent the previous day, the lowest level since the end of March last year.
Equivalent London interbank offered rates, set by a smaller panel of banks, also fixed down at 1.17029 percent, a new 9-1/2-month low.
Overnight rates edged up to 0.378 percent from 0.375 percent but are seen hitting a trough around 0.35 percent in coming weeks on the excess liquidity which rose to 425 billion euros, according to Reuters calculations.
Draghi said on Thursday he expects "substantial demand" for the ECB's second handout of 3-year loans on Feb. 29. Another massive uptake of ECB funding could push lending rates even lower.
"The money from the ECB has helped to at least partially unclog the funding markets and for a lot of troubled banks it buys them some time to manage their shrinking balance sheets but ultimately it can't be the solution," said Michael Derks, chief strategist at FxPro.