ECB Deposits Plummet as Rate Cut to 0%

Deposits at the European Central Bank (ECB) plummeted overnight after the European Central Bank slashed deposit rates to zero. Prior to the rate cuts, banks had deposited about $1 trillion at the ECB earning a measly 0.25 percent. Deposits fell to approximately $400 billion Thursday.

To spur lending, the European Central Bank cut both the benchmark deposit and lending rates by 0.25 percent last week. By cutting these rates, the ECB hopes that the deposits will be pulled from the bank and used to lend to consumers and businesses. Europe's economy has seen a slowdown in credit growth since the second half of 2011. The ECB hopes that lower rates can breath growth back into the continent and prevent the debt crisis from spiraling out of control.

ECB President Mario Draghi has said he expects little impact on what banks and other investors do with their spare cash. Thursday's data showed that banks simply shifted much of the near half a trillion euros they took out of the ECB deposit facility into their current accounts at the central bank. It may be some time before markets see any credit growth, as banks are being cautious and are unwilling to take excess risk in current market environments.

Most of the cash went straight into the Current Account Deposit Facility, a similar deposit scheme that pays no interest, yet is easier for banks to move money in and out of. Less than $100 billion of the ~$600 billion pulled out of deposits went back to banks to go into the "real economy."

Banks are reluctant to lend to each other for fear of not getting all their money back, so they have deposited back with the ECB much of the cash from the central bank's 1 trillion euro LTRO's in December and February. If the deposit rate cut does not kick start bank lending as they hope, ECB policymakers also indicated on Thursday that they still have other policy options.

If credit conditions do not improve in Europe, peripheral bonds could be put under pressure. A continued credit crunch could see Spanish 10-year yields move higher, back towards the dreaded 7 percent level. Should this happen, Spanish stocks, specifically the banks, would sell off. Investors could trade this by shorting the iShares MSCI Spain ETF EWP or through specific stocks such as Banco Santander SAN.