Euro liquidity fell 6% in the three months to the start of February

This article was first published in Global Investor Group.

Liquidity in the Euro area banking system fell almost 6% in the three months to the start of last month due to early repayments to the European scheme that provides financing to banks, the European Central Bank has said.

Frankfurt-based ECB said on Thursday the excess liquidity in the euro area fell €245.8bn (£219bn) from November 2nd 2022 to February 7th 2023 due largely to early repayments in November and December of funds provided under Europe’s targeted longer-term refinancing operations (TLTRO) scheme.

The ECB said in its update that, despite the 5.7% reduction in liquidity, average excess liquidity “remained very ample at levels above €4tn” though this was at its lowest level since early 2021.

The central bank reported a 7.7% reduction in the average amount of liquidity provided through monetary policy instruments, which fell in the three months €505.4bn to €6,570.9bn.

The bank said in its commentary: “The reduction in liquidity was primarily driven by the decline in credit operations as a result of voluntary repayments by banks of TLTRO III funds.”

Similarly, the average amount of liquidity from credit operations fell €497.9bn over the period, a drop of about a quarter, which again was largely down to TLTRO payments at the end of last year.

The effect of the ECB’s tough line on unwinding the third round of its TLTRO scheme was hotly debated last week at the Eurex Derivatives conference in Frankfurt.

Imène Rahmouni-Rousseau, director general of market operations at the European Central Bank, told the delegation: “We are gradually reducing our balance sheet through the repayment of TLTROs and through the reduction of our bond portfolios. By reducing our balance sheet we are reducing excess liquidity in quite a meaningful way, and one of the decisions we will have to make is the amount of liquidity we want to maintain in the long run for the financial system.”

The comments come after president of the ECB Christine Lagarde said the Governing Council would monitor the pace of the reduction of its Asset Purchase Programme activity and likely make a decision on its strategy before the end of the second quarter. The central bank has given guidance of €15 billion (£13bn) per month reductions in its APP portfolio until the end of June.

The ECB was among a group of central banks that agreed this month to boost the flow of US dollars through the global financial system, with the goal of keeping credit flowing to businesses and households.

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