The key chart
(Source: ECB; CMMP)
The key message
Trends in euro area (EA) monetary aggregates were sending important messages about intensifying competition for ST liabilities among the region’s banks even before the collapse of Credit Suisse and the bailing-in of the bank’s AT1 bondholders.
EA banks experienced outflows of ST liabilities in three of the past four months since October 2022. This reflects four consecutive months of overnight deposit outflows. Inflows in other ST deposits and, to a lesser extent, marketable securities have not been enough to compensate. They also come at a higher cost.
Two years ago, EA banks were enjoying inflows of overnight deposits costing 0.01%. Today, at the margin, they are relying more on other ST deposits costing between 1.86% and 2.26% – 172bp and 212bp above the current cost of overnight deposits respectively.
Pressure on banks with weak deposit franchises is increasing in the EA, not just the US!
Competing for funding
Trends in EA monetary aggregates were sending important messages about intensifying competition for ST liabilities among the region’s banks even before the collapse of Credit Suisse and the bailing-in of the bank’s AT1 bondholders.
(Source: ECB; CMMP)
Recall that broad money (M3) is derived from the liabilities side of the consolidated balance sheet of the euro area money-holding sector. It comprises currency in circulation plus other financial instruments that have a high degree of “moneyness” or liquidity (see chart above):
- Narrow money (M1) – currency in circulation plus overnight deposits
- Other short term deposits (M2-M1) – deposits with an agreed maturity of up to two years, and deposits redeemable at notice of up to three months
- Marketable instruments (M3-M2) – repurchase agreements, money market fund shares, and debt securities with a maturity of up to two years
Note that longer-term liabilities are excluded from the definition of broad money as they are regarded more as portfolio instruments than as a means for carrying out transactions.
(Source: ECB; CMMP)
Banks experienced outflows of ST liabilities in three of the past four months since October 2022 (see chart above). This reflects four consecutive months of overnight deposit outflows (the blue columns above). Inflows in other ST deposits and, to a lesser extent, marketable securities have not been enough to compensate. They also come at a higher cost.
Two years ago, banks were enjoying inflows of overnight deposits costing 0.01%. Broad money growth peaked at 12.5% YoY in January 2021. Narrow money (M1), primarily overnight deposits, contributed 11.3ppt to the total growth of 12.5%. Households and corporates were hoarding cash in the form of overnight deposits despite the fact they were only offering a return of 0.01%.
Other ST deposits contributed only 1.3ppt to total growth. Banks were offering -0.05% on deposits with an agreed maturity of up to one year (less than overnight deposits), 0.2% on deposits with an agreed maturity of up to two years, and 0.35% on deposits redeemable at notice of up to three months.
(Source: ECB; CMMP)
Today, they are relying more on other ST deposits costing between 1.86% and 2.26%. Growth in broad money (M3) slowed to 3.5% YoY in January 2023. Other ST deposits contributed 3.4ppt to this total growth.
In terms of monthly flows, banks experienced an inflow of €68bn in ST deposits versus and outflow of €89bn in overnight deposits. The inflow is coming from deposits with an agree maturity of up to two years, which cost 172bp and 212bp more than overnight deposits respectively.
(Source: ECB; CMMP)
Conclusion
In short, trends in monetary aggregates are telling us two key things – banks are experiencing a net outflow of ST liabilities and a substitution away from low cost overnight deposits to more expensive, other ST deposits at the margin – n.b. overnight deposits still account for c70% of the outstanding stock of ST liabilities (see chart above).
Competition for funding was intensifying even before the collapse of Credit Suisse and the bail in of the bank’s AT1 bondholders. Pressure on banks with weak deposit franchises is increasing in Europe, not just the US!
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.