Banks borrow from ECB (LTRO) and deposit at ECB – why?
I’m trying to get my head round what’s going on with the ECB, LTRO and these bank deposits. I have a view on what they’re doing but I may be wrong so please help me understand.
Last Thursday’s DD had a link to an FT.com story Banks borrow €530bn from ECB scheme. Ok, so a bunch of banks borrowed lots of money from the ECB. Today I see a story there saying Banks deposit record €821bn at ECB. So now they deposit the money with the same bank they borrowed it from.
In total lenders have borrowed more than €1tn from the ECB at a rate of 1 per cent under its three-year longer-term refinancing operations (LTRO) in February and December.
Some suggested that the high level of funds being kept at the ECB is a sign of market tension and an indication that banks are opting for safety, given that the ECB’s overnight deposit facility only earns an interest rate of 0.25 per cent. However, others pointed out that it would be impossible for banks to redeploy that level of capital so quickly.
So these banks are losing 0.75% on a loan?
On January 18th this year the ECB halved their minimum reserve requirement to 1%. Is the purpose of the above for the ECB to create money by lending it, the banks then deposit it back with the ECB who can then use it to buy the bonds of failing Euro countries? ie. is this just a bad ruse to magic up money to pretend the ECB isn’t insolvent?
I hope I’ve misunderstood.