Today, Bank of Spain released its balance sheet data for July which point to continued growth in its lending to domestic credit institutions and target2 liabilities. More specifically:
Assets
MROs increased significantly, from €45bn to €69.34bn while LTROs also posted an increase of €12.8bn, from €320bn to €332.85bn. In total, lending to credit institutions is now €402.2bn.
Liabilities
The larger growth came from Target2 liabilities, which grew €42.81bn, to €414.62bn (more than 38.5% of GDP), pointing to a continued capital flight out of Spain with Target2 liabilities still being larger than total bank lending. Banknotes increased somewhat by €1.5bn to €71.6bn, while general government deposits decreased further to just €5.3bn, a figure that has not been registered during 2011-2012. The deposit facility decreased a bit in July as well to €26.64bn (a drop of €1.15bn) while the reserve accounts increased by only €0.5bn. The Spanish banks safety buffer is now only limited to the funds in the deposit facility. Net Other Assets kept their steady decline during 2012, registering at €79.84bn in July.
What is interesting is the fact that while the increase in Target2 liabilities was €42.8bn, new net lending from BdE was €37.2bn with entries such as government deposits and the deposit facility used to also fund the outflows. As stated before, this pattern of €40-50bn outflows per month is not sustainable and coupled with the difficult government financial situation points to some sort of development in September.
Economy View 
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15 Αυγούστου, 2012 στις 20:55
Charles Butler (@ibexsalad)
»…this pattern of €40-50bn outflows per month is not sustainable … »
Are you sure about this conclusion? from June to July the 42bn in increased T2 liabilities was offset by 35 bn in refi assets – all originating at the ECB and transmitted via T2, If I’m not mistaken. Actual outflow looks like 7 bn.
Please correct if I’m mistaken.
16 Αυγούστου, 2012 στις 09:33
kkalev
Refinancing operations are not originated at the ECB, they are performed (and listed in the corresponding balance sheets) by the NCB’s themselves (which constitute the Eurosystem along with ECB). The actual ECB balance sheet is very small.
The Eurosystem is a system of central banks, just as the Federal Reserve System (although in the latter, only the NY Fed performs open market operations).
Target2 liabilities are registered as claims of the RoW in the balance of payments but they are actually not much different than the accounts of BoJ or PBoC in the NY Fed. They are not ‘loans from RoW’, rather liabilities to RoW (just as a retail bank account is registered as a bank liability).
16 Αυγούστου, 2012 στις 16:45
Charles Butler (@ibexsalad)
With all due respect… the fact that the NCBs are constituent members of the Eurosystem does not cause refi operations funded by the latter (correct, not the ECB itself) to be domestically originated any more than my owning 1,000 euros worth of Santander stock makes the 1,000 I borrowed from them owed to myself.
The refi operations are originated in the Eurosystem (which books them as such on their balance sheet), transferred to the appropriate NCBs via Target2 and then disbursed by the NCBs. Your error has you claiming that T2 liabilities are separate and distinct from refi operations, rather than the offsetting entries that they mostly are in this case, and has you concluding that the BdE is generating 40-odd billion a month in refi internally only to have it removed from the country as ‘capital flight’.
Net capital outflow from Spain via T2 over the last 18 months, as measured by the relative net changes in refi and T2 liabilities, amounts to 46 billion euros. Your calculation would have this as being 370 billion.
16 Αυγούστου, 2012 στις 18:35
kkalev
The Eurosystem balance sheet is actually the aggregated NCB and ECB balance sheet corrected for inter-system transfers.
What you are suggesting is that bank borrowing from the BdE in order to increase the Spanish Treasury government account balance (by issuing T-Bills for instance bought by local banks) is functionally different than borrowing in order to finance an outflow to a German bank (which will be booked as an increase in Target2 liabilities). The fact that both are recorded as ‘liabilities’ does not mean that they are the financing sources. Target2 is not ‘financing’ anything, any more than issuing bank reserves or banknotes, ‘finances’ an increase in the BdE asset side.
All NCB’s have unlimited ability to create Euros by crediting accounts. If St. Louis Fed had a negative balance in its ‘ Interdistrict Settlement Account’ that does not mean that it is ‘borrowing from the Federal Reserve’. Just as the Federal Reserve System consists of 12 district Reserve Banks and the Board of Governors, the Eurosystem consists of the NCB’s and the ECB. The main difference is that in the case of the Fed, open market operations are performed by NY Fed while in the Eurosystem by all of the NCB’s.
16 Αυγούστου, 2012 στις 20:44
Charles Butler (@ibexsalad)
Sorry, but I’m not even remotely interested in what the Fed does or does not do.
What I said was the ultimate source of the money used by the BdE for its refinancing ops was external and that the growth in BdE T2 liabilities reflects this and not ‘capital flight’. The cases of LTRO 1 and 2 are the best examples. The funding came to Spain from the Eurosystem as a whole and was disbursed by the BdE. The accounting entries are, respectively, net change in T2 liabilities +112bn, BdE net lending Dec-Mar +109 bn.
This is why news reports state «Spanish banks’ net borrowing from the European Central Bank hit a record high of 375.5 billion euros in July» and not «net borrowing from the Bank of Spain». And why negative net changes in Target2 balances which do not take into this account don’t represent capital flight.
Over the period, by the way, the Spanish banks’ EZ cross-border deposit liabilities (ex-Eurosystem) increased by 45 billion. You can find approximately this amount in net bond sales to offset this, but nothing gets you to 112 billion in capital flight facilitated by Target2.
16 Αυγούστου, 2012 στις 21:23
kkalev
Are you actually suggesting that NCB’s issue Target2 liabilities in order to increase their lending to banks? That is not stock-flow consistent.
For example imagine that the Spanish Treasury issued €100bn in 6-month T-Bills with the intention of increasing its deposit balance at the BdE by the same amount. The correct accounting would be that BdE assets would increase by +100bn (new lending to credit institutions) and its liabilities by the same amount (+100bn in government deposit balance), assuming that credit institutions did not have any excess reserves. In your scenario BdE liabilities actually increase by 200bn through an additional increase in Target2.
As for the LTROs, see BdE March data. MRO+LTRO increased by 146.5bn. Target2 liabilities increased only 55.2bn, the deposit facility grew by 69bn and government deposits by 14.8bn with other entries accounting for the rest of the increase in lending.
17 Αυγούστου, 2012 στις 13:14
Charles Butler (@ibexsalad)
Let’s simplify this. If increased T2 liabilities represent capital flight, from whence is the capital fleeing? The BdE doesn’t do us the favour of segregating investment flows into EZ and non-EZ and hence those which would show up in T2 and those that won’t. These totals are larger by an unknown amount over T2.
International flows for Q1 about which they provide considerable detail:
Equities – net flows fail to even fully account for divergent market performances between Spain and RoW. The effects are all mark-to-market with the implication that there may have even been physical inflows. Ignoring the latter, we’ll call it flat.
Bonds – negative 44 billion, including mtm effects of a generalized 50 bps rise in yields on 660 billion of stock.
Bills – neg 3 bn
Loans +8bn
Deposits (here we can get EZ-specific) – EZ resident deposits +128 bn, or Spain share of EZ total of same increased from 13.1 to 13.7%.
On the other hand, if you sum flows including deposits only vis a vis RoW the total matches the T2 entry of neg 112 bn. Of course, much of RoW does not clear through Target2.
Click to access a1722e.pdf
Click to access a1727e.pdf
http://www.ecb.int/stats/money/aggregates/bsheets/html/outstanding_amounts_L20.A.U2.0000.en.html
17 Αυγούστου, 2012 στις 14:12
kkalev
Let’s continue looking at the March data. As stated already, BdE increased its lending towards credit institutions by 146.5bn (although the actual amount will also depend on entries such as gold and other assets which did not change too much) while Target2 liabilities increased 55.2bn.
Here are the monthly flow for the financial account. Portfolio investment dropped 22bn while Other Investment increased 19.4bn. But if you take a look at the detailed foreign investment in Spain, you ‘ll see that the BdE increased its liabilities by 64.6bn (its foreign investment was neglidgible). Not including BdE provides a net outflow of 45.2bn which coupled with Portfolio investment amounts to 67bn.
Obviously Target2 liabilities only include financial flows through Target2 using banks as clearing agents (or for their own accounts).
17 Αυγούστου, 2012 στις 18:03
Charles Butler (@ibexsalad)
I think you’re counting the first item twice.
Removing BdE and 20% of portfolio that is equities for mtm effects:
Jan: Other -3.5 + PF -5.2 = -8.7 T2=25 Difference=16.3
Feb: Other -14 + PF -2.5 = -16.5 T2=21 Difference=5.5
Mar: Other -21 + PF -19 = -40 T2=56 Difference=16
Apr: Other -2.5 + PF -20 = -22.5 T2=32 Difference=9.5
May: Other -13.5 + PF -20 = -33.5 T2=34 Difference=0
This does no mtm accounting for bond values. Nevertheless, the sum of the five months differences is around 44 billion euros even erroneously assuming that all these amounts were cleared through T2.
There doesn’t seem too strict a relationship between changes in T2 and capital flows, not even in the ‘other’ column. But the correlation between net BdE lending and T2 is notable. The exception is Sept 2011.
20 Αυγούστου, 2012 στις 13:38
kkalev
I have to admit that balance of payments data for January are hard to reconcile with Target2 liabilities regardless if one believes that target2 finances BdE lending or not. I ‘ll have to look into the matter in more detail.
I don’t really understand why you use the BdE net lending figure. This is just the sum of open market operations minus deposit facility usage, an attempt to not account for excess reserves. That does *not* mean that funds that end up in the deposit facility were not borrowed from the BdE or that they are somehow different.
The sum of MRO+LTRO in Dec 2011 was 132.4bn and 316.3bn in March 2012 (+183.9bn). Target2 liabilites on the other hand were 150.8bn and grew to 252.1bn (+101.3bn) with the difference registering as increased deposit facility and government deposits balances (while other BdE assets did not change much).