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