Bad information seems to drive out good information – and so it is that the recently fashionable howler that rising deposits at the ECB indicate that the LTRO have had no impact have found their way onto the pages of the Journal.
The WSJ story Banks Stash money in rush for safety is flat out wrong.
RBA Debelle dealt with this is his recent speech, On Europe’s Effects on Australian Financial Markets:
In assessing the impact of the ECB’s actions, some commentators focus on the size of banks’ deposits with the ECB as a measure of their effectiveness. If these deposits are rising, the assessment is that the ECB’s actions aren’t working, because the banks are just parking their money at the ECB and not lending it to the real economy.
Such an assessment is inaccurate. The size of the banking system’s deposits with the ECB is completely determined by the ECB’s liquidity operations. On the ECB’s balance sheet, the assets it generates by lending to the banking system must also appear on the liabilities side as bank deposits with the ECB. That is, once the ECB has done its liquidity operations, the size of the ECB balance sheet is what it is the amount of deposits provides no real information above and beyond the net amount the ECB has injected into the system, which is already known. It does not tell you anything about what the banks are doing with the funds they have borrowed from the ECB.Or about how many times those funds circulate before ending up back at the ECB.
This is true of all central banks, not just the ECB. A similarly misleading statement is often made about the Fed, with bank deposits ‘piling up’ at the Fed supposedly indicating that the Fed’s policy actions are ineffective. Again, the size of banks’ deposits at the Fed is the mirror image of the Fed’s liquidity operations.
This FRBNY staff paper gives a complete description of the mechanism.
The short summary: balance sheets must balance.