So what is going on? Banks borrow 500 bn € at 1%yesterday and deposit 777bn € today at 0.25% today. They are just hoarding cash to buy sovereigns at the next bond auctions. Lend it to productive business? Forget it. They might go bust with our money. Lend it on to other banks? Well they are all a bit dodgy as well so we will just keep it on deposit with the ECB where its nice and safe. Seventy five basis points is an insurance premium worth paying for safety.
The trouble with Drahi's reverse Ponzi scheme is that the ECB takes the best collateral from banks.and as senior creditor gets paid before anyone else who might have lent on the interbank market to that bank. That's the bit Draghi forgot.
In the good old days at the BoE when Eddie George who was a banker was running the show we did not remunerate any money left on deposit with us. This was a nice earner for us and acted as a powerful incentive for banks to lend on the money they borrowed from us in our Repo operations especially when Repo rates were around 5%. You see assessing credit risk is what bankers are supposed to do!
When the deluded economist MAK took overas Governor his first 'reform' was to remunerate bankers balances with the BoE at 100 bps under repo so now British banks prefer to dump their cash back with the Old Lady where its safe rather than do what they are supposed to do, lend to business. Don't blame the banks for playing safe. Its King who makes the rules. It was the same with banking failures. Look at who made the rules and who did not enforce them to find the culprits for the mess we are now in. That's right the FSA, HMT and the BoE.
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