By Simone Meier Nov. 7 (Bloomberg) -- The European Central Bank may be forced to lower its deposit rate further if banks continue to park record amounts of cash with it overnight, economists said. ``That's the only way to take the incentive away and put the money back into the system,'' said Jacques Cailloux, chief euro- area economist at Royal Bank of Scotland Plc in London. ``They'll wait to see whether there's an improvement over the coming days, but it has started to become an issue.'' Overnight deposits have exceeded 200 billion euros ($255 billion) for 16 of the past 17 working days, showing banks remain reluctant to lend to each other even after the ECB flooded the banking system with cash and cut interest rates. While money- market rates have declined, deposits yesterday surged to a record 297.4 billion euros. In the year to Sept. 15, deposits with the ECB averaged just 534 million euros a day. ``The ECB is certainly not happy with the fact that banks are still depositing huge amounts of cash,'' said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. ``It could only be a matter of days'' before they act. ECB President Jean-Claude Trichet said yesterday he's looking closely at the issue and declined to rule out lowering the deposit rate further. While the rate will fall to 2.75 percent on Nov. 12, when the ECB's latest interest-rate cuts take effect, the gap with the benchmark rate will remain 50 basis points. The ECB narrowed the gap from 100 basis points on Oct. 8 as part of a range of emergency measures designed to ease pressure on banks. The next day, overnight deposits more than doubled to 155 billion euros. Lehman Brothers The ECB ``seems to be the only place where you can put money and know you won't lose it,'' Cailloux said. Lending between banks ran dry after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, shattering confidence and sending borrowing costs to records. Financial institutions worldwide have reported more than $690 billion in losses and writedowns since the U.S. housing slump triggered the credit crisis last year. Central banks around the world are cutting borrowing costs to counter a deepening economic slowdown. The ECB yesterday announced its second half-point reduction in less than a month, taking its benchmark to 3.25 percent. Trichet said he can't rule out further rate reductions. To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

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