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ECB released its weekly statement for the week ending on 29 June.

Asset Side

On the asset side, weekly USD liquidity-providing operations increased from $1.6bn to $2.6bn (+$1bn), continuing the trend of growth in USD swap usage. Lending to credit institutions increased by €20.3bn through a larger MRO of €180.4bn as well as an increase in LTRO (+€8.2bn). ‘Other Claims’ (ELA) did not post any significant change which is a sign of stabilization.

Liabilities Side

Bank reserves increased by €21.5bn, mainly due to a large decrease in current accounts (€19.6bn). What is quite worrying is the fact that ‘Deposits related to margin calls’ increased by almost €4.3bn, which means that assets posted as collateral in ECB liquidity operations lost value. It will be interesting to see if this change is permanent or reverses course after the positive results of last week’s Euro summit. General government accounts decreased €4.3bn.

A very positive development was the fact that ‘Liabilities to non-euro area residents’ were stable last week, which means that (especially accounting for increased USD swap usage) there actually were some net euro inflows after a long time.


This week’s MRO was lower than the maturing one (at €163.6bn, down €16.8bn from €180.4bn). Since the reserve maintenance period ends on 10 July and average current account holdings were around to €118.5bn (compared with a reserve requirement of €106.9bn), it is possible that the latest lower MRO bid is related with lower needs for reserve requirements and will be reflected in lower current account holdings (they were €95.9bn today). Still, total liquidity is higher today (deposit facility + current accounts + fixed term deposits) at €1112.9bn, compared to €1100bn in the financial statement, which might suggest funds movement from government accounts.

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One of the reasons that an averaging provision exists for banks required reserves during a maintenance period is that it stabilizes the money market interest rate. In the words of the ECB:

The averaging provision implies that institutions can profit from lending in the market and run a reserve deficit whenever the shortest money market rates are above those expected to prevail for the remainder of the maintenance period. In the opposite scenario, they can borrow in the market and run a reserve surplus.

Banks run deficit/surplus in their reserve accounts to take advantage of the averaging provision
(the recent drop represents the ECB lowering reserve requirements)

It seems that the latest 3 year LTRO’s might allow a similar smoothing scenario to occur in the EOINA rate for longer periods. The latest MRO (7 day refinancing operation) was less than 30 billion € while the rest of the banks liquidity is provided through long-term LTRO’s, with more than 1 trillion € corresponding to the 3 year LTRO’s and most of the remaining amount in 1 year LTRO.

The problem is that interest on the refinancing operations is paid on the operation maturity. With MRO’s payments happened every week while the rest of liquidity was provided through medium term LTRO’s (1 and 3 months maturity). That made the MRO rates quite ‘sticky’ since banks had to earn most of the interest quickly in order to be able to pay it on operation maturity (the 2011 MRO’s were usually quite large in size).

Now almost all of the interest will need to be paid in more than a year from now, allowing banks to play averaging games with EONIA. Since liquidity is basically an asset of ‘Euro-core’ banks (which try to find risk free places to park it, lowering the SMP term deposit rate close to the ECB’s overnight deposit rate and basically only loan among themselves), the combination of excess liquidity and low needs to earn interest fast, works to push the EONIA to even lower grounds and remove spikes (the drop of required reserves to 1% from 2% also helped since the spikes occurred on the last days of each maintenance period) since the first 3Y-LTRO:

EONIA rate

On the other hand, periphery banks have to borrow using low quality collateral (something which increases the effective lending rate) from ECB, while certain banks (like Greek banks) have to use the ELA mechanism and borrow (probably) at 3.75% (and an effective lending rate of close to 4-5%). The end result is that ‘Euro-core’ has an ‘accommodating’ monetary stance with low lending rates and excess liquidity, while the periphery faces an effectively ‘restrictive’ monetary stance while it needs exactly the opposite.

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Kostas Kalevras

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