(Aren’t all the best stories collateral stories nowadays?)
Cast your minds back to December. Borrowing from the ECB Marginal Lending Facility is ballooning past €5bn – and staying there for days on end – despite its penalty rate.
(Chart via Thomson Reuters Datastream)
What happened there then?
Macro Man took a lot of stick last month for arguing that a jump in use of the ECB’s overnight emergency lending facility wasn’t about a bank near-death, as many feared at the time, but actually, er, a bank already dead — Dexia.
The Franco-Belgian monstrosity had such a stupendously over-extended balance sheet — remember this is the unloved bank whose own management called it a ‘hedge fund of rates’ — and had pledged so much of it as collateral in the normal ECB liquidity operations, that these assets probably had to be gradually released through the MLF during the lender’s dismemberment.
There was a precedent for MLF use in the restructuring of Anglo Irish, and we’ve written before that Dexia had previously shuffled collateral from ECB operations to emergency liquidity assistance. Oddly it never caught on as an explanation though.
Well, to give Macro Man some credit — here’s the “assets” side of the latest financial statement of the National Bank of Belgium. Hat-tip to Lorcan Roche Kelly, TrendMacro Europe strategist (click chart to enlarge, highlights ours):
Quite a jump in MLF lending, from €646m to over €14bn. It accounts for practically all the ECB-wide MLF borrowing at its peak in December (some €17bn or so).
What’s more, you can tie the MLF change directly to the restructuring of Dexia’s assets by looking at “Other Assets” — the traditional home of the Belgian central bank’s emergency liquidity assistance. The drop in the other assets is as large as the increase in MLF use. As any central bank nerd will know by now, ELA uses collateral below the ECB’s eligibility threshold. So there’s been a change in the quality acceptability of Dexia’s assets as the trigger for the MLF shift.
This is why Dexia would have caused MLF (that is, overnight) funding to increase, instead of the weekly Marginal Refinancing Operation (MRO). It might be confusing, considering MRO funding is cheaper and both MLF and MRO use the same eligible collateral. You could see the MLF as maybe the arrivals and departure lounge when a bank’s assets used for funding are being restructured or disposed of at short notice. They might either be leaving the ECB system altogether or are about to re-enter.
As Lorcan points out, there’s another interesting sign of stressed funding on the assets side — foreign currency claims rise to €7,896bn from €354m the previous month, a sign of the ECB’s dollar liquidity operations (which were extended to longer maturities around this time). Dexia was an international balance sheet monster as well…
Since overall MLF use is now below €5bn again, we can conclude that either Dexia’s got rid of or sold the assets (possible and even likely, as the bank has been pulled apart like the Frankenstein’s monster it is), or the assets remain eligible at the ECB and have been waiting around to be pledged in long-term liquidity operations.
It’s admittedly debatable what the collateral was — whether Dexia could pledge government-guaranteed assets, following the French, Belgian and Luxembourgish government’s issuing of a temporary guarantee, or it had found existing (and rubbish) collateral eligible again, following the ECB’s relaxing of its eligibility rules during its December policy meeting (when it announced three-year LTROs). Any thoughts on the matter — let us know.
Even so, as extreme a case as Dexia is, the MLF use is therefore also a powerful demonstration of how the December decisions affected collateral-pledging and funding maturity decisions everywhere. You can also see in the NBB monthly financial statement, for example, the imprint of the first three-year LTRO (the LTRO amount borrowed practically triples from November to December.)
And in case you missed it — we’ll just point out the Bank of Italy’s latest financial statement too. The key number there is €160bn: the amount that Italian banks borrowed in LTRO funds in December. Which, as it turns out, was more than the total ECB funds they borrowed in November.
Related links:
Plan to nationalise Dexia finance unit – FT
Dexia sells off Luxembourg division – FT