The Distribution of Excess Liquidity in the Euro Area

47 Pages Posted: 17 Nov 2017

See all articles by Luca Baldo

Luca Baldo

Bank of Italy

Benoît Hallinger

Banque de France

Caspar Helmus

Deutsche Bundesbank

Niko Herrala

European Central Bank (ECB)

Débora Martins

Bank of Portugal

Felix Mohing

Deutsche Bundesbank

Filippos Petroulakis

European Central Bank (ECB)

Marc Resinek

Independent

Olivier Vergote

European Central Bank (ECB)

Benoît Usciati

Banque de France

Yizhou Wang

Chinese Academy of Social Sciences (CASS)

Date Written: November 14, 2017

Abstract

Since 2008, excess liquidity – defined as the sum of holdings of central bank reserves in excess of reserve requirements and holdings of equivalent central bank deposits – has tended to accumulate in specific euro area countries and in a small, slowly changing group of credit institutions.

Despite the stability of the concentration of excess liquidity in specific countries over time, the relevance of individual drivers has changed. First, risk aversion has played a much smaller role in explaining the concentration since 2013 than it did at the time of “flight-to-quality” phenomena in the period 2010-12. Second, the location of the relevant market infrastructures (i.e. central securities depositories, securities settlement systems and TARGET2 accounts) used by counterparties that sold assets to the Eurosystem has been a more important driver directing flows in the period 2015-16. In addition, the more recent concentration of excess liquidity is explained by the combination of a number of factors, such as banks following strict internal credit limits, investment incentives created by yield differences across the euro area and the “home bias” in euro area government bond holdings. Overall, the net cross-border flows of liquidity that resulted also determined TARGET2 balances.

At the individual bank level, when controlling for banks’ capital, non-performing loans, credit risk and profitability, excess liquidity holdings in relation to total assets are found to be higher for smaller and better-capitalised banks, and for banking groups with liquidity centralised at the head institution. In addition, participation in Eurosystem longer-term refinancing operations and deposit inflows are associated with liquidity accumulation. Finally, new regulatory initiatives such as the liquidity coverage ratio are explained to be creating incentives to hold or not to distribute liquidity, thereby affecting its distribution.

Keywords: Excess Liquidity, Financial Structure, Asset Purchase Programme, Bank Characteristics, Regulatory Changes

JEL Classification: D39, E41, E44, E50, G01, G28

Suggested Citation

Baldo, Luca and Hallinger, Benoît and Helmus, Caspar and Herrala, Niko and Martins, Débora and Mohing, Felix and Petroulakis, Filippos and Resinek, Marc and Vergote, Olivier and Usciati, Benoît and Wang, Yizhou, The Distribution of Excess Liquidity in the Euro Area (November 14, 2017). ECB Occasional Paper No. 200. Available at SSRN: https://ssrn.com/abstract=3071551

Luca Baldo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Benoît Hallinger

Banque de France ( email )

Paris
France

Caspar Helmus

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Niko Herrala (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Débora Martins

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Felix Mohing

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Filippos Petroulakis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://sites.google.com/site/filippospetroulakis/

Marc Resinek

Independent ( email )

No Address Available
United States

Olivier Vergote

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Benoît Usciati

Banque de France ( email )

Paris
France

Yizhou Wang

Chinese Academy of Social Sciences (CASS) ( email )

Institute of World Economics and Politics
Beijing 100836
China

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