Since the Eurosystem will be starting its QE program purchases this month while both 3Y-LTROs have already matured I would like to take a closer look at its balance sheet, especially in comparison with the last one before the large 3Y LTROs:
* total assets/liabilities are taken from the Eurosystem balance sheet and are not the sum of the simplified categories. Reserve requirements were 2% in 2011 instead of the current 1%.
From the asset side it is evident that bank lending is much lower even compared to financing before the LTROs while the Eurosystem securities portfolio is roughly the same as almost 3½ years ago. If one removes a bit more than €100bn from bank lending due to the lower reserve requirements it is clear that at least the sum of lending and securities are lower today than the level they reached during 2011.
Looking into the liabilities side we see that banknotes have increased by roughly €125bn while reserves are down almost €450bn. Even correcting for reserve requirements and banknotes, reserves are still roughly €200bn lower than their 2011 level. Although this cannot reflect anything other than increased ‘stability’ in the banking system, it also shows how much effort the ECB will have to exert in order to substantially increase excess reserves which currently stand at less than €200bn.
The above are also evident by looking at the chart of Eurosystem lending and security holdings which make it clear how the ECB is back to 2011Q3 levels in terms of its refinancing operations:
The first couple of months of ECB purchases will probably be used in order to overcome ‘inertia’ in the banking system and move excess reserves to levels that will significantly pressure money market rates. A first sign will probably be lower ‘EONIA heartbeats‘ as was the case after the settlement of the 3Y LTROs.