Back on the 11th of May, something very curious happened: the ECB's line item 5.2 from its "Consolidated financial statement of the Eurosystem", or in other words, the LTRO money handed out to various European banks, dropped by €10.8 billion. There is one problem with this: this number is not allowed to decline. Or technically, if it does, it means something is wrong.
This is how Reuters explained the first instance of a material decline from May 4: "An early repayment of 11 billion euros of low cost funding to the ECB last week may be due to a bank losing its eligibility as a counterparty or a shortage of collateral, underscoring concerns about the general health of the banking sector. The European Central Bank's weekly financial statement showed that 10.8 billion euros ($14 billion) of longer-term refinancing operations (LTROs) were repaid last week before maturity. This is unusual because banks are not permitted to repay such funds early. There are exceptions for the December and February three-year funding operations but even those officially cannot be repaid before one year has passed. "When pledged collateral becomes ineligible and the counterparty cannot come up with a replacement ... cash out of the open market operations has to be paid back," said Commerzbank rate strategist Benjamin Schroeder in a research note. "A case where an institution itself loses its status as ECB counterparty is also conceivable." According to the ECB's website, the central bank's counterparty eligibility criteria include being subject to the Eurosystem's minimum reserve system and being "financially sound".
Well, minutes ago the ECB just reported its latest May 25 weekly update, and the number was... a €21.4 billion drop.
Which begs the question: just which bank got kicked out by the ECB, which is well known to accept the worst of the worst when it comes to collateral, just how bad is the collateral situation in Europe if banks can't even be LTRO eligible, and just what will be the systemic implications if said bank is unable to fund itself in the open market which as everyone knows by now in Europe, is completely and thoroughly frozen?
And for those asking, here is the ECB's Emergency Liquidity Assistance (ELA) timeline: