Eurozone banks stopped selling sovereign bonds in November, possibly in response to the ECB's one-year lending operation conducted in late October and quarter-point rate cut in early November.

Banks bought €1.4 billion of euro-denominated general government bonds in November following sales in each of the prior four months, totalling €59.1 billion. (The figures are from table 2.6 from the ECB's Monthly Bulletin.)

The news is marginally encouraging for ECB officials hoping that the much larger three-year lending operation conducted last week, and follow-up rate cut in early December, will cause banks to rebuild their bond portfolios, thereby achieving “backdoor QE”.

The ECB is aiming for a repeat of 2008-09, when an increase in lending via refinancing operations of €361 billion during the fourth quarter of 2008 contributed to banks purchasing a record €231 billion of government bonds in 2009. ECB lending has increased by €286 billion so far this quarter (i.e. as of 23 December).

Elsewhere in today’s monetary statistics, broad money M3 fell by 0.1% in November following a 0.5% October decline but narrow money M1 edged up by 0.3%, reversing a September / October drop. Six-month growth in real M1 remains just in positive territory, suggesting a mild region-wide recession. (Real M1 outperforms M3 as a leading indicator of the economy.)

Aggregate real M1 stability, however, conceals respectable expansion in the core offset by continued rapid contraction in peripheral economies, suggesting severe recessions in the latter that will undermine fiscal consolidation plans. Trends remain extreme in Greece and Portugal, with real M1 deposits falling at annualised rates of 22% and 18% respectively in the six months to November.

The ECB’s weekly balance sheet statement shows that its conventional lending to the banking system (i.e. in refinancing operations, excluding “emergency liquidity assistance”) expanded by €214 billion or 32% between Friday 17 December and Friday 23 December. The €489 billion taken up in last week’s three-year LTRO, in other words, was offset by a repayment of €275 billion of shorter-term borrowing.

The main counterpart to the lending expansion on the liabilities side of the balance sheet was a €165 billion or 32% rise in bank reserves (i.e. balances in current accounts and the overnight deposit facility) to a record €677 billion – 28% higher than the previous peak of €529 billion reached in June 2010.

According to some media reports, the high level of reserves – specifically the €412 billion deposited in the overnight facility at the end of last week – indicates that banks are “hoarding” liquidity injected by the ECB rather than lending to each other and the wider economy. This is wrong. While an individual bank can reduce its reserves by lending or buying assets, this is not true for the system as a whole – the cash is simply transferred to other banks (i.e. the institutions where the recipients of the lent funds or the sellers of the assets hold their accounts). Aggregate reserves can be reduced only by official actions – either the ECB taking steps to drain liquidity (e.g. restricting lending at refinancing operations or issuing bills / term deposits) or governments building up cash at the ECB by issuing more debt than needed to fund budget deficits.

The surge in reserves, therefore, is simply the counterpart of last week’s lending operation and carries no implication about current or future bank behaviour.