There’s been a lot of focus on US money market withdrawals from European banks adding to the current market stress in Europe. But could this be a bit of a red herring?
Kash Mansori at the Street Light blog has pulled data from the ECB’s data warehouse, showing a steep decline in deposits held by European monetary financial institutions (MFIs) — that is, banks and money market funds.
In other words, could European institutions be pulling deposits out of Eurozone banks just as much as US money market funds are reportedly doing?
Until recently, this hasn’t been a problem because many of the withdrawals by MFIs themselves have been partially offset by an increase in deposits by non-MFIs such as households and corporations — except, in Ireland and Greece, where the non-MFIs apparently lost confidence in their own banks.
Anyhow, the total amount of withdrawals from EU countries’ MFIs by other non-European MFIs is large — almost €700bn from January 2010 to July 2011 — and that includes the UK, which has had particularly sizable withdrawals totalling almost €250m, coupled with a decrease in non-MFI deposits.
Still, a flight of deposits from European banks is not especially remarkable in light of the news flow in recent weeks.
But a follow-up post takes it further. The Fed breaks down cash assets of commercial banks in the US by those that are domestically chartered, and those that are foreign-related. And it turns out foreign-related deposits have risen by a similar-ish amount (well, about €500bn).
This may be drawing a rather long bow, however. Not only are there all the obvious caveats with comparing different datasets, but the Fed data on foreign-related banks does not break down those that are European-related from others. And for that matter, it’s not clear if all the data on MFI withdrawals from European MFIs refers to withdrawals by European MFIs (however it’s possible that it is, judging by the ECB data warehouse parameters).
And, even if we assume the European non-MFI withdrawals are mostly being carried out by European MFIs, and most of the growth in US foreign-related banks deposits are mostly due to growth in European foreign-related banks, it doesn’t necessarily indicate the two are related.
Nevertheless, there have been factors at play which may have incentivised European banks to withdraw deposits from Europe and stash over in the US. For example, an economist at Alliance Bernstein, Lars Petersen, wrote in June (PDF) that increased deposits by foreign banks at the Fed may be an unintended consequence of QE2:
There may be other motivations beyond safety. Deposits at the Fed are unusually attractive for foreign banks because of the regulatory landscape. Borrowing money via deposits that don’t exact an FDIC surcharge, and depositing them at the Federal Reserve, earning 25 basis points, is much more attractive to a foreign bank with a US branch than it is to a US bank. That regulatory gap also provides insight into why foreign-related banks have maintained sizable deposits at the Fed.
That’s not to say that nerves about European banks and money market funds didn’t play an independent part as well — Petersen suggests it does.
He also notes that much of the increase in foreign Fed deposits came from UK banks and, interestingly, Caribbean banks too (which in themselves are often viewed as a proxy for UK/European banks). It’s just difficult to say how much of European withdrawals are specifically due to Europe-on-Europe jitters.