Wednesday, May 16, 2012

Target Imbalances Continued Expanding in April

April Balances (billion euros) 

Deficit Countries
Spain -284.5 (-32.4 since march)
Italy -279.7 (-9.3 since march)

Surplus Countries
Germany +672.8 (+27.6 since march) 

Wednesday, May 2, 2012

Where is the deleveraging in Europe?

(Ireland is excluded from first graph because its meteoric rise since 2000 distorts the analysis of the other countries).

Source: ECB

Tuesday, May 1, 2012

Collateral at the Bank of Italy #2

The two graphics show composition of collateral held at the Bank of Italy ("the Bank") against Eurosystem repo operations in August 2011 and March 2012.  In each graphic, the bottom pie represents the collateral actually held at the Bank of Italy, and the top pie represents the Bank’s estimate of unencumbered collateral (net of prospective haircuts) remaining in Italy.  One thing to note, as explained in the the prior post, the amount of collateral net of haircuts at the bank including amount of overcollateralization was 126 billion euros in August and 363 billion in March. 

The differences between the pools of collateral held in August and March are stark.  The biggest jump is seen in “government-guaranteed bank bonds” due to an Italian decree issued December 6 (described in this speech by the Gov. of the Bank of Italy, P.11) which allowed banks to issue government backed bonds in return for a fee to the Italian government.  These bonds, which by virtue of the government guarantee were instantly available for financing at the Bank of Italy, represented 77 billion in credit extended by March 2012.  On the other hand, the extension of credit claims represented little additional credit by March; according to the Bank only 4 billion had been extended against whole loans made eligible by the ECB and Bank of Italy’s decision allowing for lowerquality assets to be posted as collateral increasing the total amount of whole loands posted to 54 billion (net of haircuts). 

The increase in government securities posted could be caused by several things.  One is, as documented on antehoc before, the subsidy available on Italian government bonds via lower haircuts compared with other European central clearing counterparties.  Another could have to do with the re-domestication of Italian sovereign debt in the last few months (see the picture below again courtesy of the Bank of Italy).


Collateral at the Bank of Italy #1

An interesting graphic from Bank of Italy’s FinancialStability Review just released.  The graphic details collateral pledged to the Bank of Italy (“the Bank”) against loans it has credited to counterparties in Eurosystem credit operations.

In part (a) “amounts” of the graphic we see levels of overcollateralization at the Bank of Italy among  its various counterparties in March 2012 and August 2011.   The blue is the amount actually credit by the Bank to counterparties, the yellow is the value of credit available to counterparties based on existed collateral posted (level of overcollateralization) and the red is the Bank’s estimates of the net value of unencumbered assets that are owned by counterparties and not pledged as collateral to the Bank or elsewhere.  All of the amounts (in billions of euros) represent values net of haircuts, in other words they do not represent the market value of the collateral but rather the value of credit available in Eurosystem repo operations based on the outstanding collateral. 

Part (b) details the composition of the collateral posted with the Bank.  The bottom pie represents the share of the collateral actually posted with the Bank and the top pie represents the share of unpledged collateral. 

Some observations:
  • The total amount of collateral posted to the Bank and freely available grew dramatically from August to March, from 207 to 474 billion.  Some reasons for this include an increase in the available collateral due to ECB policy changes (extension of credit claim collateral and lower ABS ratings permitted), and Italian government guarantees for certain new bank issues.  Other possibilities include an increase in the total amount of securities available (e.g. net issuance by Italian sovereign/banks) and a decrease in repo with private counterparties freeing up more collateral. 
  • The amount of overcollateralization decreased from 48% in August to 33% in March.  Yet the fact that Italian counterparties are still overcollateralized by 91 billion euros with an additional 111 billion estimated by the Bank to be available based on outstanding collateral suggests the overall liquidity position of the Italian banking system is not in acute crisis.
    • Of note, the large majority of the extra collateral resides with Italy’s biggest banks (“5 main counterparties”) who collectively hold 67% of excess while only representing 40% of borrowing. 
  • It appears that the Bank has been successful in getting liquidity to smaller banks as the amount of credit extended to “other Italian counterparties” increased dramatically, from 28 billion in August to 123 billion in March. 
    • In terms of the composition of collateral, the difference between collateral posted with the Bank and collateral freely available is quite stark.  While the vast majority of eligible assets freely available (88%) are government securities, the makeup of the pool of assets is a mixed bag.  

One Impact of Long Term Trade Imbalances

From Carlo Cottarelli's piece in the Bank of France's April 2012 Financial Stability Review