By Johanna Treeck
FRANKFURT (MNI) – Yet another record sum parked at the European
Central Bank’s overnight deposit facility highlights ongoing market
tension and could reignite concerns that the central bank’s massive
liquidity injections are failing to spur lending.
On Wednesday, Eurozone banks deposited a new record high of E528
billion overnight with the ECB, up from E502 billion the previous day.
Levels have spiked ever since the ECB injected nearly E490 billion of
3-year loans into the banking system just before Christmas in an effort
to avoid a credit crunch in the euro area.
Regardless of cyclical fluctuations typical of reserve periods, use
of the ECB’s deposit facility could hit even higher levels after new ECB
reserve requirements take effect Wednesday. The ECB cut banks’ reserve
ratio requirements to 1% from 2% in a move it says could save them
around E100 billion.
Given banks ongoing caution, they may simply transfer any
additional funds to the deposit facility. The impact this might have on
the deposit facility could be mitigated by reduced take-up of weekly
funds. But even if that put a cap on fresh deposit facility spikes, it
would do little to address the key question:
Will the ECB’s massive, long-term liquidity injections be able to
seep through the banking system into the real economy and possibly even
offer some relief to sovereign debt markets?
ECB President Mario Draghi last week sounded very optimistic on
that question. “We really see evident signs that this money does not
stay in the deposit facility. This money circulates in the economy,”
Draghi said at his monthly press conference Thursday.
The ECB president noted “by and large, the banks that have borrowed
the money from the ECB are not the same as those that are depositing the
money with the deposit facility of the ECB.”
This may be good news in the sense that some banks may actually be
channelling funds they borrow from the ECB to other banks or into the
real economy. It is also suggests, however, that there is a section of
the banking sector in which fear of counterparty risk is actually
intensifying.
It certainly seems that at least for now, the ECB’s three year
tender has not been powerful enough to unclog the Eurozone’s banking
system as a whole.
From the outset, ECB policymakers have expected the positive
effects of their new liquidity operations to take some time to filter
through. The central bank will likely await the impact of the second
3-year tender in late February, and possible changes in lending
behaviour following heavy redemptions of bank bonds in the first months
of this year, before possibly considering further measures.
“We now have a consensus that we should…let these measure
[liquidity injections and rate cuts] take full effect,” Governing
Council member Ewald Nowotny said in an interview with the Wall Street
Journal published on Tuesday. “Only after that will we take additional
decisions.”
Much will certainly depend on perceived sovereign debt risks going
forward. A turnaround in the debt crisis would help restore counterparty
trust in the banking sector. Given the amount of liquidity in the
system, this could quickly lead to a flush of liquidity for the real
economy.
Should debt market stress persist, ECB lending to the banks may not
be enough — even at unprecedented maturities of three years. To restore
trust in the inter-bank market while doubts about sovereign debt
holdings persist may require a recapitalization of the banking system.
At that point, rather than just lending, might the ECB actually buy into
banks?
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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