ECB’s weekly financial statement for March 2nd along with outstanding open market operations had some very interesting numbers, apart from confirming the fact that new net liquidity provided through the second 3-year LTRO was around 310 billion €.

First of all the last MRO dropped even further to 17.5 b€ from 29.5b€ a week before. A substantial 12 billion € decrease. By now MRO’s account for only 1,5% of total liquidity with most of it provided through 3 and 1 year LTRO’s, thus allowing averaging on the interbank lending rate which interestingly faces new lows every day.By now, ECB’s ability to steer interest rates has decreased since it would need to make substantial increases to its target rate in order to counter the averaging effect of over 1 trillion € in 3-year LTRO liquidity. Up to a point, ECB has taken an easing stance with its 2 LTRO’s.

A second and more worrying fact was the large increase (of 14b€) in ‘Deposits related to margin calls’. That means that, in just one week’s time, the market value of collateral posted to the ECB decreased by a significant percentage, pushing the lending banks to lower their effective lending (or in other words it had the end result of increasing the effective lending rate).

One of the most interesting facts was the increase of 46.6b€ in the ‘Other Assets’ category which matched an equivalent increase in bank deposits. Since ECB itself documents this category as ‘securities denominated in euro which are held outright by euro area central banks for investment purposes at their own risk’’, the increase highlights the fact that, even though ECB provided the banking system with more than 300 billion € of fresh liquidity, NCB’s still had to perform large actions.

Today’s Bank of Italy balance sheet for February shed some light on what actually happened. It seems that Bank of Italy decreased lending through MRO by 44.6b€, LTRO lending by 10b€ (which seems very strange since Italian banks should have taken the opportunity to borrow liquidity by using the relaxed collateral requirements) and made a ‘Fine-tuning reverse operation’ of 46.9b€ which seems to have been maintained till March 2 (otherwise it would not come up on ECB’s weekly statement). I don’t really see a reason for Bank of Italy to do that (especially since liabilities to the Eurosystem increased, indicating stress conditions which were only offset by a fall of the General Government account balance), one guess is that it lent out at its own risk. requiring even lower quality collateral.

Going through ECB’s financial statements will be interesting during the following weeks.

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