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Clarifying The Entirely Unremarkable Shift In ECB Deposits

Tyler Durden's picture





 

We noted the significant drop in the ECB's Deposit Facility this morning and as the day wore on it became clear that few - if any - of the standard talking heads on media channels had a clue what this meant except the standard comprehension that it must be good for stocks as the money is finally being put to good use (though as we noted bond yields would say different). While it is true that a large chunk of money has shifted away from the deposit facility, the money has not gone anywhere else – it is still sitting at the ECB, just that it is now in the ECB current account where banks place money to fulfill their reserve requirements. The catch here is that both excess reserves and the deposit facility will earn nothing from now on - so why move it? Simple, as BofAML points out, placing the money in the current account has lower operational costs for banks – if a bank places money at the deposit facility, it will be returned automatically the day after; however, if placed in the current account, it will remain there until the bank manually requests to take the money out. So, it would seem, somewhere a young associate on the Treasury Function desk just lost his job as he no longer needs to press the 'send to ECB' button every night. The reality is that the information on bank lending activities that one can infer from these ECB data is minimal at best.

Last night banks shifted €400bn+ from the deposit facility to the current account

BofAML: Why the €484bn drop in ECB o/n deposits does not matter

Massive drop in ECB deposits from €809bn to €325bn

This morning the market was very excited about the massive €484bn drop in the ECB's deposit facility last night. Unsurprisingly, words have also been flying around along the lines of “0% ECB deposit rate has worked” or "banks are finally putting their money else rather than parking them at the ECB deposit facility".

While it is true that a large chunk of money has shifted away from the deposit facility, the money has not gone anywhere else – it is still sitting at the ECB, just that it is now in the ECB current account where banks place money to fulfil their reserve requirements (Margin Chart).

A drop in deposit is not unusual, but the size of drop is

The drop in deposits is a usual one: yesterday was the first day of the new ECB reserve maintenance period (MP), naturally banks would shift money to the ECB current a/c in order to front-load their reserve requirements. But the size of the drop was larger than expected – in the previous MP, the drop in deposits was only €94bn. So, why such a massive drop this time?

Drop related to how ECB remunerates excess reserves

The answer lies with the way the ECB remunerates banks' reserves in the current account: before the rate cuts last week, the ECB was paying

1% on required reserves, 0% on excess reserves sitting in the current account (on an average basis), and 0.25% on the deposit facility

Therefore, once banks have fulfilled their reserve requirements in the early weeks of the maintenance period, they will shift the money from the current into the deposit facility to earn 25bp rather than nothing.

After the rate cuts, the ECB pays:

0.75% on required reserves, 0% on excess reserves sitting in the current account and 0% on the deposit facility

The catch here is that both excess reserves and the deposit facility will earn nothing from now on. Therefore, it does not matter anymore whether the banks put the money in the current account or the deposit facility. In fact, placing the money in the current account has lower operational costs for banks – if a bank places money at the deposit facility, it will be returned automatically the day after; however, if placed in the current account, it will remain there until the bank manually requests to take the money out.

Conclusion: one shouldn’t infer anything on bank lending

The information on bank lending activities that one can infer from these ECB data is minimal – increased lending will be indirectly reflected in an increase in required reserves and thus affect the balances of the deposit facility and/or the current account; however, with a 1% reserve ratio, the changes due to additional lending activities would be negligible compared to €800bn-plus excess cash in the deposit facility and the current account.

In future, the deposit facility may not rise to the previous highs of €800bn+ anymore because there is no need for banks to shift the money around. While this may create headlines such as "the ECB’s 0% depo rate has worked", as we explained above, the money has actually remained at the ECB.

 

Source: BofAML

 


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Thu, 07/12/2012 - 18:59 | Link to Comment g
g's picture

Fips called it.

Thu, 07/12/2012 - 21:05 | Link to Comment dlmaniac
dlmaniac's picture

So much for the currency to challenge US$, and that says sth given US$ itself is already a laughing stock.

Thu, 07/12/2012 - 18:59 | Link to Comment Itch
Itch's picture

So if it costs them nothing to park it at the ECB, then why the rush into negative yields?

Thu, 07/12/2012 - 19:21 | Link to Comment Zeilschip
Zeilschip's picture

Got lifted today non-stop in banks... Stocks downs but credit indices almost unchanged several days in a row now, VIX sub 17-18%, French sovereign bonds keep rallying regardless of what Bunds and peripherals do, new issue books massively oversubscribed, negative yields, etc etc... I admit I'm clueless about this market now... Brave man if you short this market, you'll get carried out on the mark-to-market.

Thu, 07/12/2012 - 19:17 | Link to Comment CreativeDestructor
CreativeDestructor's picture

you have to give ECB credit, they destroyed another free-er market indicator. No we have to just make wild guess on whats the stress is like. Way to go communist ECB

Thu, 07/12/2012 - 19:34 | Link to Comment BlueCollaredOne
BlueCollaredOne's picture

The ECB trying to save the euro reminds me of a certain movie that I hope this blog appreciates.

"Do you know why they put oxygen on planes?". -Tyler Durden

It's all an illusion,to qualm the masses.

Thu, 07/12/2012 - 19:37 | Link to Comment israhole
israhole's picture

This is why Zero Hedge kicks ass.  Unfortunately for America and Europe it is far too late.

Thu, 07/12/2012 - 21:25 | Link to Comment shuckster
shuckster's picture

Thumbs up for the Avatar - I came trying to be a scholar, but turned into a Jew hater. Fuck the yidz

Thu, 07/12/2012 - 23:21 | Link to Comment shuckster
shuckster's picture

And fuck the yid lover who down voted me. Jews don't go to jail, they don't collect unemployment, they don't serve in our military (but are happy to vote to send it to far away lands) - they starve our children so they can save a buck. And what do people do in response? Nothing. Because their fucking water is flouridated - prozac'd - so heavily that they can't even put together a coherent sentence. They tank the stock market by removing the money supply - killing 7 million American non Jews during the great depression, so as to prod America into joining the war they had brewing - WW2 - meanwhile, Germany becomes the target of world Jewry in response to the Jews shitting on it during WW1 - so because the Germans are pissed about being shitted on and having to eat their own wall-paper just to survive, the Jews declare war on them and bomb their country into the dirt - but of course, not a single Jew signs up for the fight - they starve America into doing their fighting for them. They are so pissed about their so called Holocaust that they butcher 60 million non Jews - a niceround number of ten times the amount of Jews that were killed. How much is enough?? Ten gentiles for every Jews killed? Not  enough you say??? 

And then they have the gall to orchestrate a terrorist attack in America in order to get the US to go solve their old beef with Babylon (aka Iraq) for some bullshit that happened 1000 years ago. And, they even have the gall to make American tax payers for the whole thing - and why? So that they can create a huge torrent of world-wide hatred for honest Americans which will probably end in WW3 against America. They even have the gall to take out insurance policies against the World Trade Center buildings in order to cash out on the deaths of thousands of innocent Americans. They run the banks, they run the government, they run everything. Ask any Jew who runs the world - watch him laugh because he knows it's him and his cabal of sociopathic brethren

If you value your ignorance, don't try to understand the world's problems. Don't research, because what you will find  will disturb you deeply. It will shake you to the core - when you learn what really goes on behind closed doors. Forget Geithner, forget Paulson, forget Obama and Romney and every other sock puppet that's put in front of your face. They are all just a front to the massive scheme orchestrated against you and your family and everyone you know and love - in order to break you down, in order to get you to sign up for your own permanent slavery. Does TV make you more productive? No. Yet you are told to watch it. Does owning a gas guzzling car help you in any way? No. Yet you are told to buy one. Everything that hurts you and your family, you are told to do. You will be burried in the landslide. Maybe you won't be the first to go, but you won't be the last either. It's all a game, an elaborate one orchestrated by the world Jewry against the Gentile - to avenge years of perceived wrongs - wrongs  that you did not commit, but somehow must now atone for

The ultimate lie of our day is convincing people that we aren't in hell. Fire and brimstone is everywhere. People are suffering no matter where you turn. Wake up. This is hell. You are in it, and you cannot leave. Satan is Jewish. He is your warden

Thu, 07/12/2012 - 21:21 | Link to Comment Lee Adler- The ...
Lee Adler- The Wall Street Examiner's picture

As soon as every major media outlet misreported it, I immediately pointed out the error this morning on Twitter ( https://twitter.com/Lee_Adler ) to Tyler and everybody else who reported it. The money can never leave a central bank's balance sheet until the central bank sells or redeems the assets backing it. It can only move from one liability item to another. It's like the Hotel California. It can check in, but it can never check out, since the central bank will never sell any substantial amount of assets. They may not grow the balance sheets any more, but they'll only shrink when hell freezes over. 

There is one scenario in which the money could leave. That would be a broad scale electronic run on European banks with depositors shifting to the US or elsewhere. Then the ECB would be forced to shed assets. Consider the implications of that. No doubt the Fed would attempt to ride to the rescue. Just thinking of the implications of that possibility hurts my head. 

That being said, the money is not trapped. As reserves, the banks can lend against them any time they want. Obviously, that's not going to happen either. Minor problem with bank capital. So we are stuck in an eternal purgatory. It may not get worse or it may, but it can never get better. http://wallstreetexaminer.com

Fri, 07/13/2012 - 03:55 | Link to Comment Debugas
Debugas's picture

if banks have so much excessive reserves why aren't they lending ?

Fri, 07/13/2012 - 04:38 | Link to Comment youngandhealthy
youngandhealthy's picture

The money will always end up at the ECB. Its a "closed" system. It is not possible to infere wether lending has increased or the decreased by looking at the depo or c/a.

Fri, 07/13/2012 - 07:11 | Link to Comment deebee
deebee's picture

Excellent article.
So many commentators refer to rising required reserves as strong indicator of lending growth. Yet they ignore the obvious sluggish growth in household/corporate credit (or GDP and house prices) since 2008.

Fri, 07/13/2012 - 10:35 | Link to Comment AvoidingTaxation
AvoidingTaxation's picture

Zerohedge, as usual best site in the worldwideinterweb

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