It’s been a rather long time since I last took a look into developments in Euro area central bank balance sheets so it is a good opportunity to do an update.
First, here’s a table (source eurocrisismonitor) with the Target2 balances for the major Euro area NCBs. What is quite evident is that during the second half of 2012 and the start of 2013, Target2 balances were reduced significantly, with the pace slowing down considerably in the last few months. Current levels seem to mostly be a function of current accounts (surpluses) rather than actual financial flows. Especially Germany has stabilized around €575bn with Spain and Italy at €280bn and €210-230bn (for a total of nearly €500bn).
The above stabilization is clear if one looks at the detailed data of the Spanish NCB (BdE):
Lending to MFIs through MRO/LTRO has stabilized since May something reflected on the Target2 net balance. During the start of 2013, the drop in refinancing operations was accounted by the reduction in the deposit facility from €47.4bn in January to €3.1bn in June. This should be considered a positive development since it probably reflects the fact that Spanish banks do not need any large liquidity buffers any more and are able to more actively use private money markets. Nevertheless, current Target2 figures seem to be quite sticky with current(+capital) account balances driving any changes.
Bank of Greece actually provides quite detailed monthly financial statements which can be used to draw important conclusions:
During 2013, the main BoG asset categories have been on a downward trend, although the pace is rather slow with a reduction of close to €10bn in the Jun-Aug period. The positive fact is that this decrease has been driven by lower demands of ELA, which has dropped from over €30bn in January to a bit less than €12bn currently. The main counterpart of the reduction has been the Target2 balance which went from €87bn in January to €54bn in August, a result of various factors such as the current account surplus of recent months, inflows from the Greek Loan Facility and some inflows of private deposits. Banknotes have not exhibited any significant changes.
On the other hand, data on collateral haircuts is quite disturbing. Collateral only dropped from €219bn to €188bn, with the overall haircut increasing from 51% to 61%. This is mainly reflected by ELA which currently carries a haircut of close to 90%! Given the current size of MRO (€61bn), its haircut (25%) and current securities holdings of Greek MFIs (close to €77bn), it seems that Greek banks have posted most of their securities holdings as collateral for ECB regular refinancing operations while keeping credit claims for ELA. Current ELA collateral is close to 50% of the loans registered on their balance sheets as assets.
The 90% haircut is obviously very worrying for two reasons. First, it means that the ability of Greek MFIs to cover any liquidity shocks (due to a capital outflows scenario for instance) is quite limited: At 50% haircut they should be able to provide collateral for additional €60bn in liquidity while the current 90% haircut will limit them to only around €10-15bn. Secondly, haircuts of this size, cast doubt on the asset quality of posted credit claims. If Bank of Greece only accepts collateral at 10% of its face value, that fact should provide a hint of what the correct recovery rate is for the relevant loans (in case of debtor defaults). In general, it seems that current asset quality of Greek MFIs is extremely low while Target2 liabilities are still quite high.