It’s been a rather long time since I last took a look at central bank balance sheets so I think it would be interesting to see where we stand, especially in the case of Greece:

BoG - Dec2012 - Feb2013

Since 2012, the ECB started to accept Greek collateral in its regular refinancing operations which allowed Greek banks to move a large part of ELA loans (paying high interest rates around 3%) to the ECB MROs. Moreover, the fall in banknotes demand continued, lowering the corresponding Eurosystem liability by €2.3bn while the new loan package (which included cash to be used by the Greek government to pay arrears) and a return of deposits back home lowered Target2 liabilities by €20.2bn to €78.14bn (40% of 2012 GDP). As a result, total bank lending dropped by €24.81bn while also lowering their costs of funds significantly (although there was a €5bn increase in time deposits in the corresponding period).

The last fact is evident in the effective haircuts applied on posted collateral (calculated simply as 1 – loans/collateral). Regular refinancing operations have a mean haircut of 22% (the debt buyback probably played its role since it allowed Greek banks to swap Greek bonds with high quality EFSF notes), making the effective lending rate close to 1% while ELA financing has a haircut close to 80% (assuming that all of ‘Other Claims’ are ELA loans) with an effective rate of.. 15%. What is rather worrying is the fact that collateral posted on ELA was rather steady despite the 80% drop in its usage, increasing the effective haircut from 47% in December to 82% in February. Greek banks have probably posted very low quality credit claims as collateral (with their best assets held for the ECB MROs), leading to large haircuts and asset encumbrance.

Since the Greek banks asset quality is not destined to improve any time soon (rather the NPL share will probably increase further), it is very important that the positive developments in the Eurosystem liabilities (banknotes and Target2) continue. Total collateral posted (€212.75bn) is still very high, especially compared to total assets available (€240bn in loans after provisions and €76bn in securities – €23bn in securities of countries outside the Euro area). The Greek banking system remainsl on a fragile balance.