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iMarketNews; ECB's Weber: To Drop Liquidity Tools In Opposite Order Of Introduction (December 9, 2009)

The gradual withdrawal of supplemental liquidity operations should not be read as signalling interest rate moves in the near-term, but it should eventually lead to a gradual rise of EONIA above the ECB's deposit rate, Weber predicted.
...
Since the ECB will continue to offer weekly MROs at a fixed rate with full allotment, Weber said he expects the EONIA to remain very close to the deposit rate in the first quarter as banks will return to weekly refi operations. However, the announcements of withdrawal of liquidity measure and in particular their implementation should move the EONIA gradually higher, Weber predicted.
"I do not expect this to be a quick process," but an orderly gradual movement, Weber said, dismissing the risk a of sharp jump in EONIA rates. Once all tenders are changed back to previous allotment procedures, the EONIA rates should once again move above the main refi rate, Weber said.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 04:25:21 AM EST
[ Parent ]

ECB's Weber: To Drop Liquidity Tools In Opposite Order Of Introduction | iMarketNews.com

We can read in what Weber is reported to have said here, some explanation of the MRO (repo) mechanism change, as a response to the crisis in providing more liquidity - in fact, the regular heartbeat phase between mid-2009 and mid-2010 would seem to correspond to that (EONIA dropped from the repo baseline to the deposit baseline, ie money was easier to come by so actual interest rates lower - at least, that's one possible reading). AW is unsurprisingly in favour of curtailing this asap:

the decision to scale back unconventional measures was needed in order to avoid further expansion of monetary stimulus, Weber argued.
By the same token, any further improvement in financial markets will call for a further scaling back of liquidity provisions if additional stimulus is to be avoided, he asserted.
"With an unaltered continuation of non-conventional measures, an improved situation in financial markets would lead to a more expansionary orientation of monetary policy," Weber said.

But:

Axel Weber, Dec 2010:

Since the ECB will continue to offer weekly MROs at a fixed rate with full allotment, Weber said he expects the EONIA to remain very close to the deposit rate in the first quarter as banks will return to weekly refi operations

He hasn't been proved right, from Dec to Feb, since the EONIA, even at its lowest, is above its standard level wrt the deposit rate during the "heartbeat" period. The fixed-rate, full-allotment mechanism for MROs is still unchanged, but the heartbeat has gone wild.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Feb 27th, 2011 at 08:37:26 AM EST
[ Parent ]

Weber is a brute. He said

As the ECB returns to a conventional liquidity framework, the ECB will also normalize that gap between its marginal lending, main refinancing and deposit rates. That gap has narrowed from 1% pre-crisis to 75 basis points at the present time. "When we see the first rate hike, this [gap] will likely have to be moved towards normality," Weber said.

What that would mean is rates going form 0.25% - 1% - 1.75% to at least 0.5% - 1.5% - 2.5%, supposedly to remove a liquidity that simply isn't there.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 09:09:49 AM EST
[ Parent ]

Note that Weber said this in December 2009, not 2010. Also that Trichet was answering to a journalist upthread who assumed "full allotment" would be removed by April 2010.

The sovereign debt crisis took everyone by surprise and has led to a full additional year of liquidity support.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 11:35:07 AM EST
[ Parent ]

Oops bad misreading on my part, I paid attention to how early in December he said it and assumed the year.

So his explanation for the low-interest stable heartbeat is that the banks were filling the tank at no-limit MROs, and having less need for overnight lending?

It still, of course, gets us no nearer to an explanation of the change in EONIA after mid-2010 - other than sterilisation.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Feb 27th, 2011 at 12:32:17 PM EST
[ Parent ]

The more I think about this the less sense it makes.

This is probably a topic for a future instalment (too many different curves already!) but consider the fact (data) that Euribor 1W (unsecured interbank borrowing at one-week maturity) is currently cheaper than the ECB's repo rate (overcollateralised borrowing at one-week maturity) and has been since 2009, though it is now trending up from its low of 0.336% (!!??) last March. How can that be an unsurprising result of market forces? If you pledge high-quality collateral, shouldn't you get a lower rate of interest than if you ask to borrow unsercured?

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 12:51:23 PM EST
[ Parent ]

I can think of two ways that could happen: Either there's no volume on the MRO, or the interbank market has decoupled completely from the discount window. But Die Seriöse Leute are getting their knickers in a twist precisely over the high MRO volume. So unless I'm missing a third option, we are looking at a decoupling between the discount window and the interbank market.

In other words, one group of banks has plenty of liquidity, and is able to fund on the interbank market, while another group has tight liquidity, cannot access the interbank market and has to rely on the discount window. That's the only explanation I can see for the relative position of the Euribor and MRO rates. And since EONIA is usually below Euribor, you get a highly suppressed EONIA.

This is very bad.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 27th, 2011 at 01:05:33 PM EST
[ Parent ]

If this is correct, we're looking at a very long bank run indeed, lasting over 28 months now, and counting.

But also, the EONIA cardiac arrest would reflect growing tensions within the group of healthier banks.

Not good at all.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 01:19:04 PM EST
[ Parent ]

Isn't "the longest bank run ever" roughly what you would predict if you tried to handle a solvency crisis as if it were a liquidity crisis?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 27th, 2011 at 02:05:29 PM EST
[ Parent ]

How long was the bank run at the start of the Great Depression in the US?

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 03:04:10 PM EST
[ Parent ]

November 1930 to March 1933. 29 months.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Feb 27th, 2011 at 04:14:27 PM EST
[ Parent ]

Woo hoo, go Yurp!

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 05:38:49 PM EST
[ Parent ]

Migeru:

growing tensions within the group of healthier banks

The break in mid-2010 is so striking that this is unlikely to be a gradual process of loss of trust between banks for overnight lending. What we need is a handle on how real overnight rates are agreed on between banks. What can raise the rate (which is an average) several days in a row? And even spike above the MRO rate? Scarcity of money overall, or non-trustworthy banks looking for deals on that market, both..?

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Feb 27th, 2011 at 03:57:48 PM EST
[ Parent ]

US embassy cables: Mervyn King says in March 2008 bailout fund needed | Business | guardian.co.uk

And what are the options of healthy banks wrt lending overnight. Can they pick and choose to whom they will lend or is there some other factor at play?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 2nd, 2011 at 08:51:01 PM EST
[ Parent ]

Re: Other views: Trichet (4.00 / 3)

What strikes me here is that the ECB has not switched back from full-allotment MROs as Weber predicted (even if it was wishful thinking). Why? Presumably, because money markets have not improved as he suggested they would.

Or, to break that down: "good" banks could get such easy access to overnight credit that EONIA was at historic lows. But "bad" banks were filling up (no ceiling) at the discount window. Why pay 1% when you can get 0.30%? Because 1% is the best deal you can get, ie other banks won't trust you at low rates.

And, if the ECB hasn't put an end to the "emergency" liquidity regime, it's because something untoward might happen if it did.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Feb 27th, 2011 at 03:10:01 PM EST
[ Parent ]

Re: Other views: Trichet (4.00 / 3)

afew:

if the ECB hasn't put an end to the "emergency" liquidity regime, it's because something untoward might happen if it did

It's a good sign that after 3 years of crisis the Commission and the ECB understand this is not a liquidity crisis but a solvency crisis. However, it's the national governments that have to do the restructurings.

Spain is forcing a recapitalization of the Cajas. Maybe the estimates of the amount of capital needed are optimistic, but they have restructured two Cajas, forced greater transparency in reporting from the banking sector, ensured at least on paper the system is already sufficiently capitalised for Basel III, and taken the political bull by the horns and told the political parties and the regional governments that the days of political control over the Cajas are over.

Germany is in denial, opposes transparency of stress tests, snipes at the Basel committee and is arguing for a resolution of the wrong crisis.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Tue Mar 1st, 2011 at 04:51:51 AM EST
[ Parent ]

Re: Other views: Trichet (4.00 / 3)

Migeru:

It's a good sign that after 3 years of crisis the Commission and the ECB understand this is not a liquidity crisis but a solvency crisis

It is good that they finally admit it.

I think it is safe to assume that central bankers have known this for some time, considering this cable:

Since last summer, the nature of the crisis in financial markets has changed. The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle. King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there's a coordinated effort to possibly recapitalize the global banking system.

Note the priority of a letting banks avoid the stigma of the consequences of their actions. Part of avoiding that stigma may very well be not to admit the systemic insolvency while working to make sure others (greeks, irelanders) carry most of the burden.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Mar 1st, 2011 at 06:37:50 AM EST
[ Parent ]

This one never gets old.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 1st, 2011 at 08:35:41 AM EST
[ Parent ]

A swedish kind of death:

King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there's a coordinated effort to possibly recapitalize the global banking system.

Three years later, here we are. No progress on either count.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Tue Mar 1st, 2011 at 08:49:32 AM EST
[ Parent ]

The only way banks have found of disposing of unwanted paper is to sell it to the taxpayers via corrupt and/or incompetent politicians and regulators, as in Ireland, the USA, etc. Writing down any significant portion of the toxic debt would show them to be insolvent. In the Euro-zone, a bank that wrote down bad debt would have to be "resolved" by the state. That would likely lead to sovereign default as the individual European states are not in good shape either. So, as in the USA, there is endless de facto regulatory forbearance, complete with sham "stress tests."

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 2nd, 2011 at 09:03:54 PM EST
[ Parent ]