The amount of surplus funds in the euro-area’s financial system fell below a threshold once set by the European Central Bank as the lower boundary of accommodative monetary policy.
Excess liquidity in the euro-area financial system, or the cash not directly required for a smooth operation of money markets, fell to 187 billion euros ($258 billion) yesterday, data published by the Frankfurt-based ECB today show. That’s the lowest level since Dec. 13, 2011 and the first time excess liquidity has fallen below 200 billion euros since the ECB issued more than 1 trillion euros in 3-year loans almost two years ago to prevent a credit crunch.
Falling liquidity levels can push up the cost of funding for banks, a prospect ECB President Mario Draghi said last month he’d be “particularly attentive” to. Still, Draghi has played down a February claim that surplus funds above the 200 billion-euro mark confirm that ECB policy is supporting the economy.
He said in September that the threshold depends on the state of fragmentation in financial markets. Short-term money-market rates should stay slightly above the deposit rate, currently at zero, as long as excess liquidity remains above a level “estimated to be in the range of 100 billion euros to 200 billion euros,” the ECB said in July.
As the recovery in the 17-nation euro-area strengthens, the ECB has repeated that it is ready to act against rising interest rates in money markets that could endanger the recovery. The rate banks charge each other overnight, or Eonia, stood at 0.09 percent yesterday. In its refinancing operations, the ECB provides funds against 0.5 percent interest.
Excess liquidity, defined as the difference between the sum of overnight deposits and current-account holdings, and reserve requirements and emergency borrowing reached a peak of 813 billion euros in March 2012. The figure has fallen steadily as banks pay back the 3-year loans early.