Talk about demand for the proverbial liquidity mop.
As FT Alphaville noted earlier, the ECB set out to sterilise up to €16.5bn of its bond purchases via the auction of one-week fixed-term deposits on Tuesday.
Demand for the deposits, however, has turned out to be almost ten times that sum.
According to the ECB, 223 banks bid to deposit a total of €162.74bn at the central bank over the next week.
Which brings Divyang Shah, strategist at Thomson Reuters, to make the salient point that the issue here is less liquid, more intermediated:
The 7-day term deposit was allocated in full which is not a surprise given the bidders were lining up at the door to give the ECB their excess cash. The weighted average allotted rate of 0.28% is only 3bps above the overnight deposit rate of 0.25% highlighting that the market did not need much of an incentive to term out their deposits. The total bid amount at 162bn and the number of bidders at 223 highlights that the problem with the money markets is not so much liquidity but intermediation. Excess liquidity in the system is over 310bn and is likely to go up further over the coming weeks and especially in the run-up to the expiry of the 442bn 1-year LTRO.
That is to say, the core banking function in the eurozone is still broken because the flow of money from savers to borrowers — what the banking system depends on to work– cannot take place without the presence of a middle man.
That middle man is currently the ECB.
Which means the old issue of trust — as reflected pre-central bank intervention by rising Libor rates — is still the critical one.
Banks simply still feel they can’t trust each other.
And that’s presumably because all ECB institutions are aware of the fact that their current liquid positions are simply the consequence of central bank intervention. More importantly, they all know the situation they might end up in, if that support was to be removed.
In a nutshell, the ECB support has become inefficient because too many institutions are dependent on it.
It’s like the idea of a helicopter drop of money. If everyone gets the same exact bundle of cash, no particular individual is actually better off in “real terms”.
Related links:
There’s too much liquidity in the eurozone (for now) - FT Alphaville
The ECB as liquidity monster – FT Alphaville
Why the ECB is a good bank with rubbish assets – FT Alphaville