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June 13, 2013 6:25 pm
The use by banks of the European Central Bank’s overnight deposit facility fell to its lowest point since November 2011, data showed on Thursday, highlighting how the central bank’s balance sheet is shrinking even as the eurozone’s recession grinds on.
ECB data showed that overnight deposits at the central bank fell to just €72bn on Wednesday night. Although the deposits can fluctuate considerably on a daily basis, this was down from €103bn on Tuesday night and the figure has been on a downward trajectory since the start of the year when banks deposited €280bn overnight.
The last sharp fall in the use of the deposit facility came last July when the ECB cut its overnight deposit interest rate to zero from 0.25 per cent. That led to a drop in the amount kept on deposit from more than €800bn to €324bn.
Deposits rose sharply at the height of the eurozone’s sovereign debt crisis as the central bank pumped liquidity into the banking system and interbank lending broke down as banks became fearful of depositing excess funds with their rivals.
“The ECB looks at this as an indicator of stress in the system,” said Julian Callow, international economist at Barclays.
““If it is falling, that will be seen as a sign of reduced stress . . . Its fall is a reflection of the fact that eurozone banks have been able to fund themselves much better in financial markets as a result of the improvement in general conditions.”
The zero per cent overnight deposit rate aims to encourage banks to place their money elsewhere but the reduction in the use of the facility, and the consequent shrinking of the ECB’s balance sheet also highlights a stark difference between it and other major central banks.
While the balance sheets of the Federal Reserve, the Bank of Japan and the Bank of England are all still growing, the ECB has chosen to highlight balance sheet shrinkage as a sign of normalisation.
It also comes as the so-called Target2 payment imbalances between eurozone central banks have been decreasing from extremely elevated levels.
“The Fed and the BoJ are expanding their balance sheets actively through asset purchases. What we are seeing at the ECB is more passive and market driven,” Mr Callow said.
Banks have also been making early repayments to the ECB of cheap funding taken out under its crisis-fighting long term refinancing operations.
However, small and medium-sized businesses, particularly in countries like Spain, complain they cannot access bank finance.
Combined with the continuing recession, that suggests the banks are more focused on deleveraging than increasing the amount they lend out, which could help kick-start a recovery.
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