Euro-Deposits on Both Sides of the Pond

A quick follow-up on a couple of stories I've been following. First, the flight from foreign banks operating in the US. The US Fed's data tells us that between the end of May and September 7^th, foreign banks operating in the US lost US$233.3bn in deposits – that's 20.3% of their total – with nearly half of that exiting since the beginning of August. As I reported earlier, they remain super-cautious, holding US$943.2 bn in cash, which is slightly more than they'd need were every single depositor to demand his money back today. And yet in response to this shrinking deposit liabilities base, they have not yet started shrinking their loan book: rather they are supporting their loan book by a) selling other securities and b) taking in US$174 bn of net liabilities from branches overseas. But clearly, sometime soon that loanbook (currently standing at US$619 billion) is going to start shrinking.

Back across the Atlantic, what's happening at the ECB? Well, it continues to pump in money. Its holdings of Euro-area securities rose a further Eu8 bn in the week to September 16^th, and its total balance sheet expanded by Eu 48.3bn on the week. The overall balance sheet continues to add leverage: total assets were 26.2x the size of the ECB's capital as of Sept 16 – the highest leverage ratio the ECB has enjoyed/endured since June last year.

But I don't think that's the main story for the ECB just now. Rather, I think the thing that needs watching is the build-up of fixed-term deposits on its balance sheet. These fixed deposits have jumped from a steady Eu74bn in mid-August, to Eu143 billion at the latest reading. 

 What are they? They are exactly what they say they are – fixed deposits. What's happening? Well, earlier this week, the FT reported that Siemens had withdrawn Eu500m+ in cash deposits from large French banks and transferred it to ECB, partly on lack of financial confidence, and partly because ECB is paying higher interest rates. In total, Siemens now has Eu4-6bn parked in ECB, mostly through one-week deposits.

In other words, not only are American depositors are quietly withdrawing deposits from foreign banks, but European corporations are also quietly withdrawing deposits from Eurozone banks. The Eurosystem of central banks and the ECB really do seem to be acting as a banker of last resort. Since mid-August, the build-up of time deposits held in ECB has risen at a fairly steady Eu14 bn a week. So far, it 's a pinprick – just half a percent a month of the Eurozone's total private sector deposits. But with an average loan/deposit ratio of 105%, the Eurozone's banks need every Eurocent in deposits they can muster.