Roughly 90% of the extra cash injected by the ECB to boost the eurozone’s economy is piling up in five of the bloc’s wealthiest countries, an ECB study has revealed.
The paper cites “risk aversion” as one reason why the money is not flowing from Germany, France, the Netherlands, Luxembourg, and Finland to the rest of the bloc, where some banks still rely on the ECB for cash.
It means banks in cash-rich nations are still reluctant to lend across borders nearly 10 years after the financial crisis broke and despite ECB efforts to keep the eurozone together and growing.
“It seems that, following the financial crisis, a general increase in risk aversion and more conservative internal risk limits among banks may still be limiting factors for cross-border liquidity flows and the broad-based interbank redistribution of liquidity within the euro area,” the 14 authors of the paper wrote.
The ECB created some €1.5trn worth of excess liquidity — cash that lenders deposit with the central banks minus mandatory reserves — since 2015 via aggressive bond purchases and cheap long-term loans to banks.
However, the fact that the money keeps accumulating in the bloc’s richest countries rather than flowing where it is needed the most, risks undoing some of the ECB’s efforts and shows the EU’s objective to create a banking union is still far from reached.
The study shows 60% of the money spent by the ECB and national central banks on buying bonds ends up in Germany, where sellers, mainly UK banks, have their accounts. France accounts for a further 20%.
The authors note that this does not fully explain why the excess liquidity is then accumulating in just five countries.
They find this is due to external factors, including healthier banks attracting more depositors and new rules making bank-to-bank lending less attractive.
“Feedback from banks and further analysis suggest that regulatory requirements and banks’ business models strongly influence the level of excess liquidity held at the individual bank level,” the authors wrote.
Meanwhile, ECB Governing Council member Ewald Nowotny has said the central bank will have to hold a discussion next month about its strategy for 2018 and the eventual exit from the ultra-easy monetary policy,
The ECB last week said the prospects for the eurozone economy have improved but the time to withdraw support has not yet come.
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