12/30/2011 12:24 pm ET

European Central Bank Overnight Deposits Reach Near-Record Entering New Year

Despite their job description, European banks are shying away from lending, and it may be hurting the European economy.

European banks parked a near-record amount of deposits at the European Central Bank's overnight deposit facility on Thursday, according to the ECB: $577 billion, or 446 euros, just $8 billion shy of the all-time high reached on December 27.

As European banks struggle to raise capital to meet new regulations, they will likely exacerbate Europe's economic woes by slashing lending to consumers, businesses and each other, while putting their money in the ultimate safe haven: the ECB's overnight deposit facility.

Morgan Stanley expects Europe's banks to cut their assets by up to $4 billion, or 3 trillion euros, in the coming years, according to Reuters. Slashing lending on that scale could contribute to a prolonged recession in Europe.

European banks are cutting lending in part to meet new capital requirements. The European Banking Authority mandated earlier this month that European banks must hold capital amounting to at least 9 percent of their liabilities by June, according to Bloomberg News. They need to raise $149 billion, or 115 billion euros, in new capital.

Meanwhile, the European economy, which will likely take a hit from government austerity measures in countries such as Greece and Italy, is likely to suffer from less lending from banks, forcing consumers and businesses to also scale back. IHS Global Insight forecasts that the eurozone's economic output will shrink 0.7 percent in 2012 and even more sharply in the countries that are most in danger of defaulting on their debt.

The size of the overnight deposit facility has broken records several times in December, indicating that European banks are worried about the safety of lending to other European banks, which largely have some exposure to European government debt. On December 12, deposits reached an all-time high of $447 billion. Deposits broke a record again on December 22, reaching $453 billion. They reached their all-time high on December 27: $585 billion, or 452 billion euros: a 10 percent increase from during the Christmas holidays.

There are other signs of distress for European banks. Over 500 European banks took $635 billion, or 489 euros, in low-interest three-year loans from the ECB before the Christmas holidays, according to the WSJ. As European banks have more than $900 billion of their own debt maturing in 2012, they likely will need to take advantage of the ECB's generous lending even more as banks slash interbank lending.