Not Lending Banks Park Record Sums at ECB

Banks hold over €1 trillion, or $1.1 trillion, in excess deposits at the European Central Bank in a fresh sign that its controversial bond-buying program is failing to have the desired effect.
The Frankfurt headquarters of the ECB.

Bank deposits with the European Central Bank have exceeded €1 trillion, or $1.12 trillion, for  the first time even though the ECB charges a punitive interest rate of 0.4 percent for holding them.

ECB figures released on Friday showed that so-called excess reserves held by banks at the euro zone's central bank reached €1.022 trillion. The record sum mirrors the huge volumes of bonds purchased by the ECB to stoke economic growth and bring inflation up to the central bank's target of close to 2 percent.

But due to uncertainty over the economic outlook, banks are opting to keep much of the proceeds from their bond sales with the ECB. Axel Weber, UBS Chairman

For the past 18 months, the ECB has been pumping money into the economy by purchasing sovereign bonds in the 19-nation euro zone. Banks hold large sums of such bonds as collateral for their refinancing transactions with the ECB, which means they’re among the main seller of bonds to the central bank.

The negative 0.4 percent deposit rate is intended to encourage banks to lend the money to companies or private households rather than park it. But due to uncertainty over the economic outlook, banks are opting to keep much of the proceeds from their bond sales with the ECB.

The ECB's ultra-easy monetary policy is controversial. Leading bankers including UBS Chairman Axel Weber, the former president of the German central bank, laid into it at the Handelsblatt Banking Summit this week, saying it was doing more harm than good by hitting savers and reducing retirement provisions while failing to boost economc growth.

“All operators in the financial markets have a far too short-sighted focus today and I no longer exclude the central banks from that,” he told the Handelsblatt Banking Summit in Frankfurt. “Monetary policy has very strongly deteriorated into a repair shop for the state and financial markets.”

The ECB’s sword of monetary policy, the tools it uses to try to stimulate economic growth in the 19-country zone, had become “blunt,” Mr. Weber, the chairman of Swiss bank UBS, said.

“In a world of zero or negative interest rates, monetary policy only works via its influence on the capital markets or the exchange rate, meaning indirectly,” Mr. Weber said. “That’s why it requires ever larger operations by the central banks to achieve the same effect as in the days when monetary policy still worked via the interest rate channel or the credit channel.”

The excess reserves are the bank deposits that exceed the so-called minimum reserve requirement with which the ECB tries to steer interest rate levels and bank lending. Uusually, the excess reserves are very low. They have surged as a result of the ECB’s bond buying or so-called quantitative easing program, launched in March 2015. So far, it has purchased €990 billion worth of securities issued by public borrowers such as governments. It has also purchased further assets such as corporate bonds and securitized debt.

 

Jan Mallien covers the banking sector from Frankfurt for Handelsblatt. To contact the author: [email protected]