Commercial banks parked over half a trillion euros at the European Central Bank, the highest on record, as the mix of debt crisis worries and a recent giant injection of ECB cash left banks awash with money but too scared to lend it.

Overnight deposits at the ECB have been hitting new records even since last month's first ever offering of three-year loans from the ECB pumped 490 billion euros ($620 billion) into the banking system.

ECB data on Tuesday showed deposits topped the half a trillion mark for the first time ever, as banks parked a staggering 502 billion euros, up from the 493 billion euros the previous day.

It is likely to mark at least a temporary peak in the level of hoarding. The end of the ECB's monthly reserves cycle - the point when banks have fulfilled their ECB targets and have few options to juggle their funding - ends on Tuesday.

Deposits traditionally drop when the new reserves cycle begins and banks have more funding freedom. Changes to the ECB's reserves rules, which will mean banks have to keep less of a cash buffer at the ECB, will also kick in on Wednesday.

The move will cut banks' reserves ratio requirements to 1 percent from 2 percent and is set to save banks 100 billion euros according to the ECB.

On one hand that could mean banks - who won't be able to repay old ECB loans early - may have even more spare cash to deposit.

Alternatively, the impact may be minimal if banks react by cutting back on what they take at the ECB's once-a-week, 7-day funding handouts.

With total ECB lending at 664 billion euros, banks are now storing over three-quarters of money lent by the ECB at the central bank, compared to around a third after the collapse of Lehman Brothers back in late 2008.

The recent rise in the headline deposit number was largely expected by money market experts considering banks' huge uptake of the three-year funding.

While banks deposited less than 300 billion euros at the ECB at the peak of the last two reserve maintenance periods, the proportion - at over 65 percent - was not much lower than it is as now.

This deep reluctance of banks to lend to one another continues to paralyze money markets and highlights the barriers to achieving any substantial relief in the euro debt crisis.

Last week ECB President Mario Draghi said the ECB's three-year loans were clearly having a beneficial impact and were finding their way into the real economy as well as helping to calm government and bank bond markets.

While yields fell sharply at Spanish bond auctions last week, the success was not replicated at Italy's sale of three-year debt on Friday, however, and S&P's downgrade of nine euro zone countries has cast fresh clouds over the bloc.

Deposits at the ECB could even top the current half trillion euro record if banks' reluctance to lend on the open market is not cured by the end of February when the central bank will inject the second of the two rounds of three-year funding it currently has planned.

Source Reuters