Ok, so when the ECB prints money, we will see bond yields rise in the eurozone and we will see deposit rates go back up, when banks get more liquidity.
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This chart below will reverse itself and we see it already for Portugal and Spain.
deposits
Spain’s tax on deposits
Today I read about the new tax on Spanish bank deposits.
I wonder how fast the deposit outflows will accelerate in Spain’s case, because the trend is not good. See the precipitous decline in Spanish deposits (green). I’m waiting for the May 2014 numbers to come out soon.
I also think the negative rate from the ECB will have its effects soon.
Actually, a tax on deposits is just the same as negative interest rates. It all comes to your money being routed to the government either through inflation or through taxes…
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| Eurozone deposits |
The effect of ECB negative deposit rate
The recent news about the ECB imposing a negative deposit rate in June 2014 has spurred a new trend. The deposits at the European banks is seeing outflows.
Who would want to hold deposits with negative rates? They will of course take their money out and hunt for higher yielding assets.
See what happens to the deposits of the periphery in Europe on this chart:
Deposits Over Loans: Excess Reserves
What happened in 2008 was a once in a lifetime event and this is illustrated in the following chart comparison. There was a historic correlation between deposits and loans, but that correlation has broken down since the 2008 financial crisis.
Since 2008, deposits have increased at the banks, but lending by banks has not gone up substantially. All of this money is parked at the Federal Reserve at ultra low interest rates. It is not flowing into the economy and as long as lending doesn’t grow, the Fed can’t raise interest rates. More so, the Fed can’t stop QE until lending goes up substantially.
The difference between the deposits and the loans are the so called “excess reserves”. Historically, a high amount of excess reserves will be quite inflationary, the question is when will we see all of this inflation come? When lending finally starts (red curve goes up), inflationary pressures will come. The Federal Reserve will have to sell its bonds and mortgages, reduce its balance sheet to counter this inflation. Or it can raise interest rates. The question is, will they see this coming or not? Will they act appropriately soon enough or be too late to counter inflation? I’m not counting on it, that’s why I protect myself against inflation.
As mentioned before, the amount of excess reserves is the difference between deposits and loans and it is shown in the chart below:
As you can see, we had $2.4 trillion in excess reserves in January 2014, which almost matches the amount of money printing or QE from the Federal Reserve. When this trend reverses, it could mean that lending growth has started, that banks are finally using their excess reserves to buy things and that’s the moment when we will see the inflation coming. So monitor this chart!
For more info read this article.
(If you’re wondering why there is a bleep in 2010, that’s the “Financial Accounting Statements No. 166”. This new set of rules deals with the way U.S. banks must handle off-balance-sheet vehicles (OBSVs). They needed to bring these off-balance-sheet items back on their books.)
Bank Deposits Update
Latest data shows no deposit flight yet in February 2013. Greece did decline together with Portugal, Ireland and Cyprus. But Italy and Spain had deposit increases.
We’ll see what happens in March 2013…
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| Chart 1: Deposits Eurozone |
Belgium deposits are not safe
I happen to live in Belgium and there are some people there arguing with me about gold. I keep telling them to buy gold but they insist not to buy it.
What they don’t take in account is that Belgium is the next in line of the PIIGS. Belgium has one of the largest debts in the Eurozone and has the highest taxes. As a result I don’t think that higher taxes will be an option.
So the only other option is to take your deposits like in Cyprus. Belgium happens to have a lot of uninsured deposits ready for the taking (Chart 1).
With this chart I will have another argument up my sleeve. Of course I already prepared myself by taking all my money out of the bank.
Correlation: Deposits Vs. LTRO: How to monitor deposits of Eurozone banks
Now that everyone is scared of the bank runs, it is necessary to monitor the deposits at the peripheral countries.
The data is available at the ECB site:
I compiled the data for the most important countries to watch, namely, the PIIGS. And of course Cyprus.
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| Chart 1: Total Deposits of Peripheral Eurozone Countries |
If Cyprus falls, let’s see what will happen to the PIIGS. Probably they will fall too.
I will give a monthly update on this.
I challenge you: do you see a correlation here between deposits and something else?
Yes, it’s the ECB’s LTRO lending to banks (Chart 2). The country that gets the most LTRO will have the most deposits on their banks. That’s because most of the deposits just stay on the balance sheets of the banks. Normally loans should go up, but that’s not the case anymore since 2008. The deposit to loan ratio is going up (Chart 3).
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| Chart 2: ECB Lending to Banks |
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| Chart 3: Deposit to Loan Ratio U.S. Banks |
If all people take their money out of the bank, we get a bank run. Result is that the loans will disappear and go bad. We get an entire collapse in the financial system. So I expect to see LTRO coming back soon as Chart 1 tells us that deposits are again decreasing.
Correlation Economics (Backup) 