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I recently wrote a post on the ECB waiver (for Greek government collateral) and what its expiration on 20 August would entail. Since BoG released its August balance sheet it seems that this question has been answered.

BoG August 2018 balance sheet

As is evident there was no significant change in the relevant amounts of either regular refinancing operations or ELA financing during August apart from a very small fall of €350mn. What actually changed was the total amount of collateral posted by Greek banks which fell by €5.33bn. Since regular financing operations total amount remained constant it appears that collateral quality was enhanced given that the relevant haircut was reduced from 30% to 15%.

It is obviously interesting to know how Greek banks managed such a task. Unfortunately, bank balance sheets data from BoG is not available for August so we will probably need to wait a bit more to find out.

One last interesting fact was the large increase in government deposits of close to €14bn which coincided with an equal drop in Target2 liabilities. This was due to the disbursement of the last round of funds towards the Greek government (by the ESM) which was used to increase its cash buffer. As a result, BoG now only «owes» €26.50bn to the Eurosystem while simultaneously holding €64bn in securities (mostly as a result of the QE program).

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:

Eurosystem Simple Balance Sheet 2011 and 2015

* 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:

Eurosystem Lending and Securities Holdings 2011 - 2015

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.

 EONIA 2012 - 2015

Since the second 3Y LTRO matured this week while the ECB QE starts in a few days it is interesting to take a quick look at the overall liquidity position of the European banking system. According to the latest Eurosystem weekly statement, lending through regular refinancing operations (MRO and LTROs) was €501.3bn during the preceding week (this does not include the sizable ELA lending of Greek banks which appears to have increased by €5.6bn).

Based on the outstanding OMOs, total lending now stands at €488,3bn. A large part of the maturing 3Y LTRO was replaced by higher MRO lending (which increased to €165.35bn from €122.11bn in the previous week) yet overall financing was €13bn lower and now stands at less than €500bn. In other words, total bank financing is now close to the allotted amounts of each of the two 3Y LTROs (first: €489.2bn, second: €529.5bn).

Obviously the European banking system has lowered its reliance on Eurosystem financing substantially. It seems that any increase in the Eurosystem balance sheet will only be the product of outright purchases through the ABSPP/CBPP3 and government bond program. It is even probable that individual banks will use the newly created reserves in order to reduce their reliance on Eurosystem financing and free encumbered collateral which will result in lower MRO allotments in the next few weeks. Consequently, one should observe almost immediate effects on repo market rates and turnover by the upcoming ECB QE purchases.

BdE released data on financing in the Eurosystem for October 2012. On the BdE balance sheet front developments are quite positive. Both MRO and LTRO funding of domestic credit institutions was lower (-€33bn) with most of the drop attributed to lower MRO credit (-€23.4bn). Reserves increased a bit with the deposit facility growing to €25.3bn from €21.75bn in September. The main source of lower funding needs were lower Target2 liabilities which dropped €36.2bn to €383.6bn, back to June levels. Deposits to general government remained quite low at €4.4bn. Overall, the BdE balance sheet suggests easing of money market conditions for Spanish banks.

In the case of financing to the private sector (households and non-financial corporations) developments were mixed. September effective lending flow for households was still quite negative at €2.84bn (down a bit from €3.83bn during August) with housing dropping €2bn, while NFC lending actually registered a positive effective flow of €1.06bn after a strong drop of €11.17bn in August. This made the total quarterly drop much lower and allowed the Spanish economy to register a mild GDP drop. It will be interesting to see if this change persists in the coming months.

The ECB released its weekly statement for the week ending at 1 June 2012. A few comments:

Assets Side

Loans to credit institutions increased by €13.8bn, mainly due to an increase in MROs. ELA increased by €4bn (entry ‘Other claims on euro area credit institutions ‘). What is worrying is that in the previous weekly statement we had a very large increase in ELA (and a decrease in normal refinancing operations) due to problems with Greek banks having negative capital. Although banks were recapitalized (with €18bn) on 28/5, there was no obvious reversal in ELA lending, on the contrary both ELA and the MRO increased substantially. These are  clear indications of a very stressed environment and of a probable ‘hidden’ capital flight financed by NCB liquidity operations.

Liabilities Side

On the liabilities side, the large increase in bank reserves (€4bn in current accounts and €24.9bn in the deposit facility) was coupled with a drop of €24.9bn in general government deposits (which would probably explain the increase in the deposit facility). Banknotes increased by €5bn. What is worrying is the €9.2bn increase of the entry ‘Liabilities to non-euro area residents denominated in euro’ which probably corresponds to capital flight to foreign currencies (such as the Swiss franc with the SNB maintaining a currency floor which would imply possible increases in its euro reserves). The corresponding entry has been on an upward path during the recent weeks:

Overall, my view of the Eurosystem has not changed since last week: A stressed liquidity environment probably exists in certain periphery countries while a general (but still limited) capital flight from the Euro is visible. Monthly statements for May from the NCBs will be quite interesting.

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Kostas Kalevras

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