UPDATE: Banks' ECB Deposits Smash Previous Record High After 2nd LTRO

--Surge in deposits isn't positive or negative, analysts say
--Surge doesn't mean banks aren't using ECB cash
--Amount borrowed at weekly ECB loan operation likely to fall in coming weeks



FRANKFURT (Dow Jones)--Banks parked far more money in the European Central Bank than ever before after the ECB flooded the financial system with easy money this week, but analysts said the surge in overnight deposits doesn't mean the cash infusion won't stimulate lending to households and businesses.

ECB deposits rose 63% to EUR776.9 billion Thursday from EUR475.2 billion on Wednesday, way over the previous record high of EUR528.2 billion reached Jan. 17, in the wake of the ECB's first three-year loan operation.

The surge "isn't positive or negative, it's just a reflection of excess liquidity in the banking system, which has increased significantly," said Marco Valli, an economist at UniCredit in Milan. "This isn't a sign that banks are doing nothing with the ECB's money."

The overnight deposit level has been elevated since August 2011 as banks use the ECB to hoard excess cash instead of lending money to one another amid fears over each other's exposure to risky euro-zone sovereign debt.

The latest surge came after the ECB allocated EUR530 billion at its second, and probably last, three-year loan operation Wednesday.

That brought to more than EUR1 trillion the amount pumped into banks since the ECB expanded lending in December, offering inexpensive loans for three years instead of one year and allowing banks to use a broader range of collateral against those loans.

The increase in deposits is "a mechanical feature" of the ECB's balance sheet, said Christian Schulz, an economist at Berenberg Bank in London. "If lending goes up on one side, liability must also go up. The rise in itself doesn't mean much."

If banks use the money they borrowed from the ECB, it will still return at some point to the central bank due to the level of excess liquidity in the banking system, analysts said.

"If a bank uses the liquidity to meet redemptions, then it pays out the bonds that come due, this money goes to the bondholder, which parks it back with the ECB," Valli said.

ECB President Mario Draghi said Thursday that the number of small banks snapping up three-year loans Wednesday indicates the operation is likely to boost lending to small and mid-sized companies -- the ECB's goal.

The first round was widely praised, including by the International Monetary Fund, for helping to restore confidence in the euro zone and avert a major credit crunch. ECB Governing Council member Ewald Nowotny said Wednesday evening he hoped the latest injection would be passed on to the economic sector and revive money markets.

Still, the IMF said Thursday the ECB's actions haven't yet been fully reflected in recent credit developments, nor have they led to the restoration of interbank lending across Europe. The fund said it is unlikely the operations can turn around private credit in the region, which stagnated in January after a large drop in December.

According to Schulz, banks may have used some of the ECB's three-year loans to replace other funding sources given that the level of deposits increased by only about EUR300 billion Thursday, less than the EUR530 billion lent by the ECB Wednesday. That means the amount borrowed at the ECB's main weekly refinancing operation is likely to fall in the coming weeks.

That was certainly true after the first three-year loan operation, when use of the ECB's weekly loans fell from nearly EUR300 billion in mid-December to EUR111 billion in mid-January.