DEBUNKING THE ECB DEPOSIT MYTH

Q. WHAT’S THIS ABOUT ECB DEPOSITS BEING AT ANOTHER RECORD HIGH?

A. Everyday we are treated to a new run of stories about a record amount of cash being “hoarded” in vaults at the European Central Bank (ECB). They are based on daily statistics put out by the Bank on the amount in its “deposit facility” – overnight accounts that lenders keep at their central bank to store excess cash over and above the amount they must hold in their current account. Yesterday saw the deposit facility store more than half a trillion euros.

Q. WHAT DOES THIS MEAN?

A. If you believe some erroneous media reports, it means banks are “hoarding” the money. It makes a compelling narrative: the ECB finally agrees to pump cash into Europe’s financial system on an immense scale – which it did by offering hundreds of billions in loans in December – and lenders end up “hoarding” it all in their bank accounts.

Q. WHY IS THAT ERRONEOUS?

A. The numbers in fact say nothing of the kind. In fact, the data only tells us what the total amount of cash stored in the deposit facility is. It doesn’t tell us which banks put it there. The cash could easily have circulated and still ended up in the ECB. So for example, if bank A takes out an ECB loan and lends it to bank B, which lends it to a business, which pays an employee with it, who puts it in his account at bank C, which stores it at the ECB, it shows up as money “hoarded” in the deposit facility. In fact, ECB president Mario Draghi was keen to tell the world that the banks taking out loans are not the same as the ones putting it in their ECB accounts: it is moving around.

Q. SO WHAT TO THESE NUMBERS ACTUALLY MEAN?

A. They just mean that there has been a huge expansion in the money supply available to banks. No kidding: the ECB made it available last month. Whether that money is being “hoarded” or not remains to be seen.