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The latest SMP term deposits data show increased bidding for the 7-day deposit facility, while the marginal rate has dropped to 0.26%, essentially equal to ECB’s deposit facility. The excess bid increased by more than 100 billion € after the second LTRO:

Date Bid Amount Alloted Excess Bid
22 Feb 372.2 219.5 152.7
29 Feb 331.9 219.5 112.4
7 Mar 452.1 219.5 232.6
14 Mar 437.4 218 219.4

It seems that at least 1/3 of new net liquidity created through the second LTRO of 29 February does not have any immediate productive investment opportunity and is bid at the SMP 7-day deposit facility, signaling that the corresponding amount can be parted for at least  a week from its holder bank.

Excess bidding drives the rate paid by ECB to the rate of the overnight deposit standing facility. Since the 7-day deposit is equivalent to a weekly risk-free repo transaction, the SMP rate sets a floor for short term repos (for risk-free assets). That corresponds to monetary easing for banks with access to excess liquidity and risk-free assets, mainly the banking systems with positive Target2 balances (Germany, Netherlands, Luxemburg and Finland), in a period where inflation risk is still elevated due to energy prices, while the periphery still faces high effective lending rates, low access to interbank lending, high unemployment and a deep recession.

Nomura (which first pointed out the high excess bidding at SMP deposit auctions) suggested that the ECB create a tradable 7-day Debt Certificate security in order to facilitate trading and repo lending. In my view such a policy would not be very successful since the banks acquiring the DC would be the ones with excess liquidity and not the ones with a liquidity deficit. What would probably be very helpful is a program like the Fed’s ‘Term Securities Lending Facility’ which would accept periphery collateral (for instance government debt) in exchange for high quality securities held outright by the ECB. One problem is that ECB’s monetary is quite different from the Fed’s, with low outright purchases of paper and a focus to short/medium-term lending. As a result, ECB’s high quality securities portfolio might be quite thin.

In general, SMP bidding makes the absence of a risk-free Eurobond quite clear, with banks seeking low yield/risk/term returns at an ECB created ‘repo market’, instead of lending their Euro-periphery counterparts, since the latter do not actually have access to high quality collateral and face sovereign and balance sheet risks.