Deposits Flee From Europe's Banks

European banks are losing deposits as savers and money funds spooked by the region’s debt crisis search for havens, a trend that could worsen economic and financial conditions.

Retail and institutional deposits at Greek banks fell 19 percent in the past year and almost 40 percent at Irish lenders in 18 months. Meanwhile, European Union financial firms are lending less to one another and U.S. money-market funds have reduced their investments in German, French and Spanish banks.

While the European Central Bank has picked up some of the slack, providing about 500 billion euros ($685 billion) of temporary financing, banks are cutting lending, which could slow growth in their home countries. They’re also paying more to keep and attract depositsor, in the case of Italy, selling bonds to retail customers for five times the interest they offer on savings accounts -- which will erode profitability.All of this is symptomatic of a lot of fear in the European financial sector,”economist at Experis Finance in Charlotte, North Carolina, which advises U.S. and European companies. “It shows that even European banks don’t trust each other anymore, so they’re taking their money out of the EU system. It’s similar to the dDeposits by financial institutions in Greek banks, which make up 21 percent of the total, have fallen by one-third since the beginning of 2010, while those by non-financial firms and residents dropped 9 percent, according to Bank of Greece data.deposits by financial institutions, which account for one-third the total, declined 12 percent over the same period and 24 percent since the September 2008 collapse of Lehman Brothers Holdingsfigures show. In France, where the erosion started last year, the same type of deposits, which make up half the total, are down 6 percent since June 2010. They have fallen 14 percent since May 2010 at Spanish banks, where they account for one-fifth of the total.Deposits include money kept in banks by individuals and companies. Most of the short-term funding supplied by financial institutions and money funds is counted as depositscentral banks in EuropeWhile retail deposits at Italian banks have fallen only 1 percent in the past year, the outflow of money from financial institutions has exceeded $100 billion, a 13 percent decline, according to BankSome of the retail deposits have been invested in bank bonds sold directly to retail clients that pay as much as 5 percent, compared with an average interest rate on deposits of 0.88 percent. Retail investors in Italy own about 63 percent of bank debt, compared with a European average of 48 percent, data compiled by the Bank of Italy and banking associationIn Portugal, where banks raised the interest rates they pay savers, non-residents have reduced deposits by 19 percent since March 2010.The eight largest money-market funds halved their lending to German, French and U.K. banks over the past 12 months and stopped financing Italian and Spanish financial firms, according to data compiled by Bloomberg from investmentA survey by Fitch Ratings showed thatmoney-market funds reduced their lending to European banks by 20 percent from the end of May through July. The funds cut investments in Spanish and Italian lenders by 97 percent, to German firms by 42 percent and to French ones by 18 percent, FitchThe Aug. 22 survey covers almost half the $1.53 trillion assets held by money funds Moody’s Investors Service today cut the long-term debt rating one level on Credit Agricole SA and Societe Generale SA, the country’s second- and third-largest lenders by assets, citing the euro-region sovereign debt crisis and concerns about “the structural challenges to banks’ funding and liquidity profiles France’s biggest lender, was kept on review for a possiblepercent at 4:02 p.m. in Paris trading, while SocGen declined 8 percent. Credit Agricole fell 2 percent.To make up the deficit, firms are leaning onfor short-term funding. Borrowing by Italian lenders from the central bank more than doubled to 85 billion euros between June and August. Greek and Irish banks each took about 100 billion euros fromAugust. Irish lenders also got 56 billion euros from their domestic central bank. Portuguese banks borrowed about 46 billion euros while Spanish banks took 52 billion euros in July. it will lend $575 million to two euro- area banks, without identifying them, a sign that they’re finding it difficult to borrow the U.S. currency in markets.By accepting those countries’ bonds as collateral in exchange for funds,piling up risk, said Desmond Lachman, a fellow at the American Enterprise Institute in Washington. In the event of a defaultlosses would be borne Lending to the region’s banksother central banks is about seven times the capital of the Eurosystem, the consolidated balance sheet of all euro zone central banks.“If there are sovereign defaultswill be left with garbage that has been accepted as collateral“It’s putting EU taxpayers’ money at risk in a very non-transparent way. But there’s no alternative. is the only game in town.”declined to comment about the risk to the central bank.Trichet has defended his institution’s actions. European banks have more collateral that they can place with the exchange for additional financing if they need it, he  Sept. 8 in Frankfurt.We stand ready to provide liquidity as we have done in the past,

The outflow of deposits is a measure of eroding trust in the region’s financial system. Banks outside of Greece, Ireland, Portugal and Spain have $1.7 trillion at risk in loans to those countries’ governments and corporations, as well as guarantees and derivatives contracts, according to the Bank for International Settlements.

Concern that those nations will default or leave

devalue their currencies has hastened the flight, according to Dimitris Giannoulis, a Deutsche Bankanalyst based in Athens.People “are now afraid of the possibility of returning to the drachma,”referring to the Greek currency in circulation before the country adopted the euro in 2001. “Just a headline is enough to spook depositors.”Irish banks have been the hardest hit. Losses on the collapsing real-estate market and a government guarantee of bank liabilities forced the nation to seekassistance in November. The money started

flowing out in early 2010 as confidence in the government’s ability to support the banks waned, and it accelerated later that year after Ireland’s rescue by the EU led multinational companies to move deposits out of the country.

Ireland took control of five lenders and is winding down two of them. Even Bank of Ireland, which wasn’t nationalized because its losses weren’t as catastrophic, saw deposits dwindle by 20 billion euros, or 23 percent, last year.

At Allied Irish Banks Plc, Ireland’s second-largest lender, deposits declined 37 percent over the past 18 months. The bank most of the drop occurred at the end of 2010 and in the first quarter of this year as companies pulled money amid sovereign and bank downgrades. Deposits since the end of the first half have been “broadly stable, the lender’s director of corporate affairs and marketing, who declined further comment.While “the rate of outflow is falling,” Finance Minister 1 in Dublin, that hasn’t soothed savers such as Phil Carey, an 86-year-old mother of eight from Galway in western Ireland.“I wouldn’t trust the banks,who keeps her savings at credit unions. “I’d be afraid of them. Look at the money they gave to the builders and the terrible situation we’re in nowIt isn’t easy for retail depositors such as Carey to move funds abroad. In Ireland, there has been some shift to units of foreign banks operating in the country. RaboDirect, the Irish online-banking unit of Utrecht, Netherlands-based Rabobank Group,eposits rise about 40 percent in 18 months, according to General Manager Roel van Veggel.While the implosion of Irish banks led the government to seek in Greece the state’s finances collapsed first. Now Greek lenders are feeling the pain because they own about 40 billion euros of their government’s sovereign debt. If they have to take losses of 40 percent or more on those bonds, it would wipe out all the capital held by the country’s banks, the European Commission estimated in July. Greek government bonds are already discounted by 60 percent in the secondary market, according to data compiledIn addition to fearing a drachma conversion, some affluent Greeks are moving money out of the country to avoid having their bank accounts become targets for tax collectorsAs the government starts looking for revenue, starts fighting tax evasion, wealthy families move their money outwho covers Greek, Irish and Portuguese banks.That dynamic is also at work in Italy, according to Carlo Alberto Carnevale-Maffe, a professor of business strategy at Milan’s Bocconi University. Deposits at Milan-based Intesa Sanpaolo SpA, Italy’s second-biggest bank by assets, fell 4.4 percent in the year ended in June.People are moving deposits into safe goods such as gold and safety-deposit boxeThey’re simply putting the money under the mattress to avoid taxes.”In terms of flight to quality, no, I must tell you that we are not experiencing in our country anything like that,”European lenders are also moving money out of the region. The cash that foreign banks keep at theFederal Reserve has more than doubled to $979 billion at the end of August from $443 billion at the end of February, according to Fed data. The increase in bank depositssmaller, suggesting that healthy European firms are putting money in the Fed instead of lending to weaker banks, according to economist Mansori