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
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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