Here are some updates to the recent discussion on loan growth weakness relative to rising deposit balances at US commercial banks
Earlier this week, CNN Money ran a story on JPMorgan’s quarterly results. Instead of focusing on the earnings, the author’s (Stephen Gandel) discussed the fact that JPMorgan’s loan-to-deposit ratio (LTD) hit a new low.FORTUNE: – The nation’s large…
The Federal Reserve remains concerned about exiting the massive bond buying program that has been in place for over a year now. The program has become a bit of a trap (see post), creating a dependence on an unsustainable levels of stimulus. The concern…
We’ve received a number of questions regarding the recent post on the trajectory of the US loan-to-deposit ratio (see post). Many are wondering how such fluctuations are even possible. That’s because the classic view in economics is that deposits …
The euro area banking system excess reserves are continuing to decline – touching the lowest level since 2011.
Just to put this in perspective, the chart below shows excess reserves in the US. With the Fed continuing to pump liquidity into the system, these swelled above $2.3 trillion last week – a new record.
The reason the Eurozone reserves are declining has to do with the area’s banks gradually repaying what they have borrowed from the Eurosystem via MRO and LTRO loans.
 |
| Source: ECB |
Some economists view this decline in excess reserves as an indication of tighter monetary conditions in the Eurozone. They point to weak consumer credit growth and a severe contraction in corporate lending.
 |
| YoY change in loans to euro area households (source: ECB) |
 |
| YoY change in loans to euro area companies (source: ECB) |
A few economists have called for Mario Draghi to offer up another round of LTRO lending or lower the rates on MRO (short-term) loans in order to boost excess reserves. The thought is for the ECB to follow the Fed’s and the BOJ’s lead at the October meeting and expand its balance sheet.
Such action however is unlikely at the next meeting. Certainly if these declining excess reserves push up rates, the ECB will have to act. But the central bank does not have the Fed’s dual mandate and is not as focused on the Eurozone’s dangerously high unemployment levels. Instead Draghi will concentrate on forward guidance of maintaining low overnight rates for the foreseeable future. The ECB will want to keep the LTRO tool in its back-pocket in case the crisis flares up again. After all, there is a nonzero risk of the German Constitutional Court ruling against the OMT program (ECB’s commitment to directly purchase government bonds of periphery nations). Other issues, such as political uncertainty in Italy (see post), could potentially reignite the crisis as well.
For now Draghi will want to see if the Eurozone’s credit markets can begin to “heal” themselves. The members of the Governing Council are following a number of business surveys which seem to point to stabilization in the area periphery nations.
 |
| Source: Econoday |
If however lending volumes do not show a visible improvement in the next few months, another LTRO program could be in the works at a later date.
Bloomberg: – Frederik Ducrozet, an economist at Credit Agricole CIB in Paris says an LTRO is unlikely until December. The central bank could boost its forward guidance by putting a definite end date for loans at a particular cost, by issuing an LTRO with a fixed rate, he said. The previous loans were charged at the average of the ECB benchmark over the maturity.
‘‘A properly-designed LTRO would have the potential to kill several birds with one stone by enhancing forward guidance, keeping excess liquidity higher for longer, and further boosting the use of collateral from small businesses,’’ Ducrozet said.
ECB officials including Executive Board member Benoit Coeure have played down the short-term likelihood of a new round of long-term loans, saying that while it remained an option, it hasn’t been specifically discussed. The ECB’s Governing Council convenes in Paris on Oct. 2 for its monthly rate-setting meeting.
From our sponsor:
www.SoberLook.com
The decline in euro area banks’ excess reserves has been quite spectacular. Excess reserve levels are back to 2011 levels.Source: ECBSome are attributing this to banks “no longer hoarding cash” and therefore lending. That’s nonsense. This decline in ex…
Here is a quick followup to an earlier post on pushing the elevator button more than once. It will not make the elevator come any sooner.The Fed’s securities purchases have sharply increased banks’ excess reserves, while credit expansion continues…
The US repo rates have risen to a 3-year high this week. The chart below shows the so-called General Collateral (GC) treasury repo rate. GC simply means that the borrower under the repo loan can post any treasury securities as collateral – as…
Switzerland is vote crazy. It has a referendum on most issues. There is a vote coming up that I’m sure will pass. This time around, the Swiss are going to vote themselves a big salary increase. As a result, Switzerland will have the highest minimum w…
Jul 21, 2011
Why banks aren’t lending
By Ellen Brown
Why aren’t banks lending to local businesses? The Fed’s decision to pay interest on US$1.6 trillion in “excess” reserves is a chief suspect.
Where did all the jobs go? Small and medium-sized b…
