Bank of Italy March balance sheet was released today and it contains some very interesting data:

  • Banks increased their lending by EU75.2bn. The increase came from new LTRO lending of EU127.6bn, the retirement of a fine-tuning operation of almost EU47bn and a drop in MRO lending to the (negligible) amount of EU2.4bn (down from EU7.8bn). Total central bank credit of EU270bn is now a substantial percent of the Italian banks holdings of securities (EU860bn in February), even if Bank of Italy accepts collateral at par (which it does not). A large part of bank assets are now parked in ECB.
  • Net liabilities to the Eurosystem increased by the same amount (??) as central bank credit to EU270.4bn.
  • Although bank reserves (basically the deposit facility) increased by EU6bn, the change is attributed only to an equivalent decrease in the general government account.

What’s mostly troubling is the increase in Target2 liabilities. Unless Italian banks lent foreign Euro banks (which is doubtful, especially since loans would most probably be requested from high risk periphery banks), that means that LTRO net liquidity was effectively drained in just one month’s time. Apart from a different term structure on their loans, Italian banks are mostly back to their pre-LTRO position. Carry trade is now effectively over and this will probably be reflected on sovereign bond yields (and could explain the events of the last few days). Keeping an eye on Target2 numbers will also be important in order to verify that the increase in net liabilities was not due to loans to other European banks.

Another thing to keep an eye on in my opinion is usage of the MROs (which is available in the ECB weekly statement). If Italian (and other periphery) banks start to face liquidity constraints, that should translate to more MRO loans (which is equivalent to tightened monetary policy, since interest is paid at the end of the MRO).

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