ECB deposit facility

In the operation on December 20, the ECB lent to 1 percent at three years a total of € 489 bill. as a result of a set of mechanism that has led the central bank to ease the stress of funding between banks.

The question that arose was whether the banks would buy the bonds of PIIGS or as in the case of United States reinvested the amount obtained in the window of the ECB.

The central bank has two mechanism at disposal of the european banks for overnight deposits, Marginal Lendig Facility (MLF) and Deposit Facility. The overnight deposits through the Deposit Facility, loans without collateral, hit a new high of  €452.034 billions with previous level of  €411.813 billions. The change between december 20 and 27 is  €187 billions, amount considered new cash to the eurosystem.

This show that banks prefer reinvest the proceeds of the LTRO program to 0.25 percent in the Deposit Facility of the  ECB  to lend each other in terms of short-term. In other words the stress between banks prevails by the distrust between them and its a matter of time to see if this proceeds will keep there or will be allocated in italian or spanish bonds.

This week the Italian government issued around 10 billions of bills and zero coupon of two and six month at much better yields of the last auctions, this thursday will be issued 8 billions of ten year bonds. It´s too early to say if the mechanism have worked since the amounts auctioned are too low.

The deposits made by the banks at ECB have been increasing since the publish of the stress test (late july) resulting in the recomendation of recapitalization of the  banks. Probably in this ocation the  banks are prefering keeping the cash for future application of  Basilea III.