German Banks Flushed With Cash From Capital Flight Across Europe

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Cash deposits in Germany rose year-on-year by 4.4 percent to 2.17 trillion euros ($2.73 trillion) in April, claimed figures by the European Central Bank (ECB) on Thursday, with the rest of Europe continuing to withdraw savings from local banks into the eurozone’s safest market.

According to Bloomberg News, deposits in Spain, Greece and Ireland shrunk by 6.5 percent to 1.2 trillion euros during the same period, while Greek banks also saw a 16 percent drop in its deposits.

“The longer the debt crisis lasts, the more funds will flow to Germany,” said Dieter Hein, a banking analyst with Fairesearch GmbH in Frankfurt suburb Kronberg. “People think of Germany as the euro area’s safest country.”

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German banks are now benefitting from a “flight of quality”, says Germany’s financial regulator Bafin, which has sparked a liquidity boom for domestic lenders.

Deutsche Bank, for instance, saw an extra 5 billion euros in customer deposits from September to March. Commerzbank, on the other hand, added about 7 billion euros in deposits in the first three months of 2012.

What’s more, foreign-owned banks within Germany have also seen an increase to their liquidity. According to the Bundesbank, , Germany’s central bank, German branches of foreign lenders saw their deposits rise by nearly 22.5 billion euros to 82.9 billion euros from last year.

“It makes a lot of sense actually from the banks’ point of view,” said Mark Macrae, an analyst covering emerging market banks at Prague-based brokerage Wood & Co. “Relative to what they have to pay back home, I guess that it’s an efficient way of getting liquidity.”

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German banks now face a “luxury problem” in finding places to invest the deposits, says Philipp Haessler, a banking analyst with Equinet Bank AG in Frankfurt. Consumers may also end up losing out due to lower interest rates on their savings, Haessler added.

“In the end it is a question of supply and demand. The more money flows to Germany, the lower the interest on deposits should be.”