DCSIMG

The plunge in the ECB’s deposit facility usage does not really tell us anything new

Jan von GerichThere have been quite a few headlines on the huge drop in the usage of the ECB’s deposit facility, close to EUR 500bn to be more specific, the largest drop ever. This has once again raised interpretations that banks have now started to lend to the real economy, as the zero per cent ECB deposit facility rate has discouraged depositing money at the ECB.

This interpretation would be totally false, at least based on the deposit facility usage data. The use of the deposit facility is largely determined by how much excess liquidity there is in the system, which in turn is affected strongly by how much banks borrow from the ECB via refinancing operations. This money can return to the ECB through the current account holdings of banks or the usage of the deposit facility.

It is normal that when a new reserve maintenance period starts, as it did yesterday, the usage of the deposit facility falls, as banks aim to meet their reserve requirements early in the maintenance period to allow for more flexibility later (the reserve requirement is determined for the average during a maintenance period, not for a daily limit).

True, this time the jump in the current account holdings of banks and the fall in the deposit facility usage was much larger than usual, but there is a simple explanation for this as well. The ECB pays interest amounting to the main refinancing rate, currently 0.75%, for required reserves, but no interest to excess reserves. As the central bank does not pay interest at the deposit facility any more either, banks do not have any incentive to use the facility, as an alternative to holding excess reserves at their current accounts. Hence the huge drop in the deposit facility usage.

To sum up, the plunge in the deposit facility usage does not really tell us anything new. A comment by the ECB’s Bonnici (head of the Central Bank of Malta) that the steep drop in the deposit facility usage was a good sign sounds odd. If lending to the real economy starts to pick up, this would gradually lead to an increase in the required reserves, and thus also a fall in excess liquidity. As the required reserves amount to just over EUR 100bn, while the deposit facility has had around EUR 800bn of usage lately, it is not hard to see that this kind of excess liquidity will not be removed from the system via increased lending to the real economy and higher reserve requirements. The money cannot disappear from the banking system: as long as banks borrow more from the ECB than is needed to fulfill the reserve requirements of the banking system, there will also be excess liquidity.

ECB deposit facility usage plummets, but current account holdings jump

 

 

 

 

 

 

 

Jan von Gerich's research

Latest research

Swedish Morning Briefing - Thursday 17 April

• Separatists in Donetsk plan for a local referendum • A summit in Geneva to discuss the crisis in Ukraine

FI Eye-Opener: Easter bunnies to boost bonds today

Yields edged higher yesterday – long positions with potential today. Equities rebound, but more weakness likely ahead. Euro-zone core inflation back to record-lows. Italy taps retail investors for huge amounts again. Big US banks boosting their lending to companies – Euro-zone doing much worse. Philly Fed, jobless claims and LTRO repayment announcement. New French 2-year benchmark and US auctions ahead.

US Rates - Market in doubt

• It has been a bumpy ride for US rates in 2014. A two month rally started the year and recently the Fed has added substantial volatility with their somewhat wobbly way of commenting on future policy. • Further, the last NFP on April 4th was quite a disappointment. • In this note we look into the market perception (through futures and options) of all this, and in particular find indications towards a loss of faith (on rising rates) on behalf of the option market.

Swedish Morning Briefing - Wednesday 16 April

• Putin urges UN to condemn Ukraine’s intervention • Chinese growth at weakest level for six quarters

FI Eye-Opener: No support can survive constant pounding

German 10-year yield finally broke important support – mood remains bullish. A correction higher in yields still looks likely today. US equities recover after early losses. Q1 effect hits Chinese GDP numbers again. Ukraine’s military starting to use force US core inflation bottomed out? Euro-zone inflation and US housing market data ahead – Germany to sell 10-year bonds.

China: The impossible duality

China’s Q1 GDP growth of 7.4% was marginally higher than market consensus. It was caused by a combination of cyclical slowdown and structural shift away from the traditional growth drivers. Beijing is likely to continue the fine-tuning policies and stays away from large-scaled stimulus.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Tuesday 15 April

• Obama warns Putin • Ukraine raises policy rate

Competitiveness of the Nordics

Financial crisis and subsequent Euro crisis have cast doubts on the future prosperity of the Nordic countries. This report takes a closer look at the competitive position of the Nordics over past ten years and aims at answering how worried these countriesshould be.

FI Eye-Opener: Still going lower

Bond yields rebound, but bonds with more performance potential left. Intra-Euro-zone spreads narrow. Equities rise – more downside potential in the near term. US retail sales beat expectations. Eyes on US CPI and Yellen’s speech.

EM FX: Ukraine takes the headlines again

The Ukrainian President's deadline for rebels occupying state buildings in Eastern Ukraine to lay down their weapons have passed. Markets are awaiting news. EM FX is slightly weaker this morning, especially the RUB, the PLN and the TRY, but it seems that markets are becoming more resilient to headline news from Ukraine.

Swedish Morning Briefing - Monday 14 April

• Brighter outlook for global growth • Swedish finance minister worried about inflation

FI Eye-Opener: Please stop strengthening, we are asking nicely

Bonds with more gains on Friday – German 10-year yield to break lower today. Finnish bonds feeling some pressure after a negative outlook by S&P. Correction lower in equities has further to run. ECB fights the stronger currency with words – and talks further about QE. LTRO payments continue coming in – ECB more concerned about the rising euro. US retail sales & inflation, Chinese GDP and corporate earnings ahead. New French 2-year benchmark out this week.

Week Ahead: 12 - 25 April 2014

We cover two weeks in this Easter edition of Week Ahead. Important data prints from China, US inflation, PMI's, German Ifo and more...

Global FX Strategy: QE-nomics

Despite the QE-rumours, we still believe that the EUR has some upside left versus the USD short term. Find out why in this edition of our flagship FX publication, alongside views on NOK, SEK, JPY, AUD, CAD, NZD and Emerging Markets currencies. Enjoy!

European FI Strategy: Mad about QE

Euro zone QE talks all over the place, but there is still room for curve flattening and demand continues to be strong, also for Scandies. Find out what we favor in this month's edition of European FI Strategy.

Swedish Morning Briefing - Friday 11 April

• Finland – S&P affirms AAA but lowers outlook to negative • Nasdaq sees largest decline since November 2011

Finland: King of ratings no more

The credit rating agency Standard & Poor’s surprisingly changed its outlook for the AAA rating of Finland from stable to negative, the first major rating agency to do so. The action puts more pressure on the already shaky government and will deliver a hit to Finnish bonds, very dependent on the highest ratings.

FI Eye-Opener: Bye, bye, Finnish AAA?

Bonds with a big rally yesterday – curves bull-flatten. German 10-year yield gathering momentum to break lower – a correction higher in yields still likely today. Finnish credit rating starting to feel pressure – more pressure for the shaky government. Huge demand for the new Greek benchmark. US consumer confidence and IMF Spring meetings ahead. Italian auctions concluding a busy supply week.

Northern Lights: Goldilocks?

Following this morning’s CPI figures, the Riksbank is widely expected to cut rates. But how can you trade SEK and Swedish Rates in this environment? Find out more on that, alongside updated views from our macroeconomists and strategists across the Nordic region. Northern Light gives you everything you need on Scandinavian Macro, FX and Fixed Income. Enjoy!