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ECB: Money creation has not led to lending or asset purchases by banks - Natixis

Patrick Artus, Research Analyst at Natixis, notes that it is sometimes argued that the ECB’s liquidity creation as part of its quantitative easing has been ineffective because this liquidity has remained parked in the form of euro-zone banks’ reserves.

Key Quotes

“This argument is completely wrong: if the ECB creates money (central bank money; monetary base), this money remains in circulation, mainly in the form of bank deposits at the ECB, for as long as the ECB does not destroy it.”

“This is not the reason why money creation has not led to lending or asset purchases by banks (or by other investors): these possible results of money creation lead to no destruction of central bank money.”

“Be careful not to make a big mistake

  • Once money (central bank money) is created, it only disappears if the central bank destroys it.
  • Banks’ deposits at the ECB, which are the main component of the monetary base, therefore remain higher as long as the money is not destroyed.
  • It is therefore completely normal that the increase in liquidity created by the ECB has led to a lasting increase in banks’ deposits at the ECB. In no way does this show that the increase in liquidity has not had any effect.
  • Banks’ lending and asset purchases do not reduce their deposits at the ECB by any means.”

Author

Sandeep Kanihama

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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