Banks Borrow Most in Three Days at Emergency Rate

By Christian Vits

Oct. 2 (Bloomberg) -- Banks borrowed more than 15 billion euros from the European Central Bank at its emergency rate for a third day yesterday, pushing the amount lent over a three-day period to a record.

The ECB's marginal lending rate is 5.25 percent, one percentage point above its benchmark rate for regular auctions. At the same time, banks deposited 48.5 billion euros ($67.5 billion) with the ECB overnight, the central bank said in a statement today. The deposit rate is 3.25 percent

Commercial banks are refusing to lend to each other after the U.S. housing slump caused the collapse of New York-based Lehman Brothers Holdings Inc. and forced governments to bail out banks in the U.S. and Europe. Central banks including the Federal Reserve and the ECB are injecting billions into global money markets in an effort to keep them functioning.

``Trust has completely left the system,'' said Thorsten Polleit, chief German economist at Barclays Capital in Frankfurt. ``I don't see a return to more normal conditions any time soon.''

As some market players are flooded with cash after the ECB's continued liquidity injections, the ECB also offered to drain 200 billion euros from money markets. This is the second drain in two days, after banks' deposits with the ECB jumped to a record 102.8 billion euros on Sept. 30.

More Inventive

The ECB may have to become even more innovative to get banks lending again, say economists at Morgan Stanley and UBS AG. Options include enabling banks to borrow cash for longer timeframes as it did this week when auctioning 120 billion euros for one month or allocating money at a fixed rate rather than letting it be set at elevated levels by market demand.

``The ECB will remain very active in the money market to address the liquidity issue,'' Stephane Deo, chief European economist at UBS AG, said this week.

The ECB today also drained 199 billion euros in overnight funds from money markets at a fixed rate of 4.25 percent. It had previously offered to absorb 200 billion euros. Some 65 banks bid for a total of 216 billion euros.

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net