Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Banks Are Hoarding Cash Again
Transcript
- Lucas: So the European Central Bank has been paying banks to park money with it for years now, and banks are taking full advantage. The deposit facility just hit a record three point two trillion euros, and that's a number that should make us pause. Luna: Three point two trillion. That's a lot of money sitting idle. Usually, banks want to lend, not hoard. Lucas: Right. And the twist is, the ECB's deposit rate is still negative, minus fifty basis points. So banks are literally paying to leave their cash there, yet they keep doing it. That tells you something about the alternatives. Luna: What are the alternatives? I mean, if negative rates are such a drag, why not lend more or buy assets? Lucas: Partly because lending demand is still soft outside a few pockets, and partly because of something that often gets overlooked — the tail end of the TLTRO program. Those cheap loans from the pandemic are maturing, and rather than redeploy that funding, banks are just parking it at the ECB. Luna: So they're replacing expensive wholesale funding with cheap central bank money, and then they get charged for leaving it there. That seems like a wash, at best. Lucas: But there's more to it. The real driver is the regulatory push under Basel three. New liquidity coverage ratios are forcing banks to hold a buffer of high-quality liquid assets, and central bank reserves count as just about the most liquid thing you can hold. So even if it costs them a bit, it's the easiest way to comply. Luna: So they're gaming the system a bit — parking cash to meet rules instead of putting it to work. Lucas: And it's not just the smaller banks. We're seeing the big players doing the same. Look at the euro-dollar exchange rate, holding steady at one point one seven, despite all this. That's partly because the ECB's balance sheet is still bloated, and banks' demand for reserves keeps the system flush. Luna: But doesn't the ECB want banks to lend more to spur growth? This seems to work against that. Lucas: Yes, and it's a real tension. The ECB is basically paying banks to hold reserves, but it can't easily stop because that would destabilize markets. So the result is a curious equilibrium: negative rates, but a record amount of deposits at the central bank. Luna: Is there any sign that this is changing? Like, are banks starting to lend more? Lucas: Actually, yes. The latest data on bank lending to households and firms has been ticking up, especially for mortgages. But the excess liquidity is still piling up. So lenders are doing both — lending a bit more, but also hoarding more. Luna: That's an interesting split. It feels like banks are cautious, but not paralyzed. Lucas: Exactly. And that caution has a cost. It's one reason why the euro hasn't strengthened even as the European economy shows signs of life. If banks were deploying all that cash, you'd expect more upward pressure on the currency. Luna: So does this mean the ECB's policy is kind of stuck? Like, they can't raise rates without penalizing banks even more? Lucas: That's the million-dollar question. Any move toward normalization would reduce the value of those reserves, but banks are already hooked on them. It's a bit of a trap. Luna: It's almost like the banking system is more fragile than it looks, even with all that cash. Lucas: Fragile in a different way. It's not a solvency issue, it's a structural one. The banks have plenty of capital, but they're earning next to nothing on a huge chunk of their assets. That's a drag on profitability. Luna: And that profitability drag could have knock-on effects, right? Lower profits mean less capacity to absorb losses down the road. Lucas: Precisely. And that's the kind of thing regulators are starting to worry about more openly. They don't want to force banks to lend, but they also don't want them to be so comfortable that they ignore risk. Luna: So what's the way out? Is there one? Lucas: Some economists argue the ECB should introduce a tiered deposit rate, like they did in 2019, to exempt a portion of reserves from negative rates. That would reduce the cost for banks and maybe give them more incentive to lend. Luna: But wouldn't that just encourage them to keep hoarding even more? Lucas: That's the risk. It's a delicate balance. The ECB is walking a tightrope between supporting lending and keeping the system stable. Luna: It feels like a never-ending loop. Banks hoard cash, so the ECB thinks about tweaking, but any tweak could backfire. Lucas: Yeah, it's a bit of a catch-22. But I think the key takeaway is that this excess liquidity is not just a technical footnote. It's shaping the euro, bank profitability, and the broader credit cycle. Luna: And it's something we should all pay attention to, even if it's not as flashy as a stock rally. Lucas: Definitely. And if you're following these kinds of economic puzzles, you're exactly the kind of listener we appreciate. This show is ad-free and listener-supported, so if walking through the economy with us has made something click, and you feel like it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. No pressure, just a small way to keep things going. Luna: And every little bit does help us keep digging into these stories. Lucas: Now, back to the bigger picture. Even if the ECB starts tweaking its tiering system, the structural demand for reserves isn't going away. So this cash hoarding is likely to be a feature of the Eurozone system for a while. Luna: So in a way, the banks are adapting to the environment, but the environment itself isn't changing much. Lucas: Right. And the next thing to watch is whether this starts to show up in the real economy. If lending does pick up more strongly, we might finally see some upward pressure on the euro, but that's still a big if. Luna: I guess the lesson is, don't take those headline numbers at face value. There's a lot of inertia underneath. Lucas: Exactly. And that inertia is a story in itself — one that will shape policy decisions for the rest of the year.