The ECB Is Plugging Holes
Today the ECB released its monthly data on monetary developments in the Euro area (EA), as measured by M3 and its components. The market usually focuses on the marketable assets portion of M3, M3-M2, as a representation of funding access – here’s an FT Alphaville post highlighting as much. In December 2011, M3-M2 declined 0.2% over the year, its first annual decline since early 2010. What’s going on here? The ECB’s plugging holes.
There’s an evolution in marketable debt that is telling a very interesting story regarding bank funding through December 2011. As each private funding market shuts down, the ECB compensates by relaxing its lending facilities and collateral rules, effectively shoring up bank liquidity.
Look at the chart below: it maps out the dynamics of the components of marketable instruments in the EA, M3-M2, in levels of seasonally adjusted billion €. See Table 1 of the release, or download the data here. Since September 2011, the level of repo lending dropped 21%, or – €107 billion. Not coincidentally, the ECB started to introduce longer-term refinancing operations starting with the 1-yr in LTRO October. Holdings of debt instruments <2 years increased €40 billion, as banks use the securities for collateral under the ECB’s lending operations.
The ECB is offsetting, at least partially, the crunch in private repo funding markets.
This policy behavior is evident throughout 2010. Spanning the period January 2010 to August 2011, money market securities fell -€ 108 billion while private repo lending rose € 179 billion. The ECB offset fully the dropoff in funding from mutual fund shares by flushing private repo markets with liquidity.
The Table below describes the dynamics of funding through marketable assets more succinctly.
It’s pretty clear what the ECB is doing: plugging up the bank funding holes left exposed by private capital markets. What’s next?