December 22nd, 2011
Econintersect: The euro area sovereign debt crisis sparked an outflow of bank deposits from countries in the periphery to commercial banks in Germany and other core countries. A new report by Matthew Higgins and Thomas Kiltgaard for the Federal Reserve Bank of New York shows how these commercial bank flows have created large imbalances for the Eurosystem national central banks. The result is that funding by the ECB for the individual national banks has experienced dramatic shifts over the past three years.
Follow up:The effect of the Eurosystem credit facility of the ECB (European Central Bank) has been to compensate for the flight of deposits. Otherwise capital inflows would have been needed to keep the national central banks solvent as they have provided the capital to sustain the viability of the commercial banks in their respective countries.
Econintersect will make it simple: Hundreds of billions have been transferred to the periphery to prevent collapse of the commercial banks there. This transfer has been significantly offset by a decrease in ECB capital for German banks which have been bolstered by comparable deposit inflows from the periphery.
Two graphs from the report make the offsets quite visible. In the first graph the left scale increases positively and the right scale increases negatively.
In what is seen in these numbers, there is little monetary easing or creation of addition currency creation. What is buried behind these numbers is the loosening of credit standards as the national central banks accept progressively weaker assets at nominal current value and then apply haircuts as market values drop. This creates a sharing of such losses by the German central bank. From the report:
Any losses would be shared by the Eurosystem as a whole rather than by creditor central banks. The Bundesbank, for example, would bear roughly 27 percent of any losses, in line with its share in the Eurosystem.
This constitutes a form of backdoor bailout for the periphery by Germany, but one that is compensated by increased bank deposits within Germany from the same region.
This discussion is related to the news of the day (December 21) as the ECB conducted another infusion of loans to 523 banks. See Wall Street Cheat Sheet. This appears to be outside the purview of the national central bank accounting process of the NY Fed study. The total amount of the loans was €489, which seems large compared to the numbers that appear in the report. However, it is likely that much of the total amounted to rollover of existing loans that were maturing or had much less than three years to maturity.