Step 1 of QT is operating at full speed. Step 2 of QT is just starting.
By Wolf Richter for WOLF STREET.
Total assets on the ECB’s balance sheet, released today, plunged by €1.005 trillion from the peak in June 2022, to €7.83 trillion, the lowest level since June 2021:
The ECB had two major types of QE: It handed very large chunks of cash to banks via free-money loans, and it handed cash to the bond market by purchasing government and corporate bonds and asset-backed securities.
The ECB announced Step 1 of QT at its October meeting: It made the loan terms less attractive, thereby causing banks to pay them back, which removed this liquidity from various markets via the banks.
The ECB announced Step 2 of QT at its December meeting: reducing its bond holdings by letting them mature without replacement, limited by a cap.
So far, the reduction of its balance sheet has been mostly through Step 1 of QT, the reductions in loans.
The loan QT: liquidity rug-pull.
As part of the massive QE operations during the pandemic, the ECB lent cash to the banks via what it calls the Targeted Longer-Term Refinancing Operations (TLTRO III) with complex incentives that were so favorable that banks took the money and plowed it into whatever. From the beginning of the pandemic through July 2021, the ECB handed out €1.6 trillion of TLTRO III loans.
This came on top of the remaining loans from prior programs (LTRO) of €620 billion, bringing the total loan balance to €2.22 trillion at the peak in June 2021.
The loans have dates at which they can be paid back. The first payback date was in July 2022, when €74 billion in loans were paid back; the second was in November, when €296 billion were paid back; the third was in December, when €498 billion were paid back. At the January and February windows, smaller amounts were paid back.
The total balance of TLTRO Loans has now plunged by €995 billion from the peak in June, to €1.22 trillion today.
The ECB has always handled QE via loans, including during the “whatever it takes” moment in 2021:
The bond QT: now starting.
Step 2 of QT, announced at its December meeting, starts in March, initially at a rate of €15 billion a month. At the February meeting, it announced that the ramp-up period of €15 billion a month will go through June. It said it will decide on the future pace by then. Comments by ECB governors about the future pace of the bond QT indicate that it will accelerate after June.
These bonds will come off the balance sheet as they mature, which is when the ECB will receive cash in the amount of face value of these bonds. The roll-off is capped at €15 billion a month initially. Any proceeds from maturing bonds beyond the €15-billion cap will be reinvested in bonds.
The ECB ended its bond QE in June 2022, and “securities held for monetary policy purposes” have remained roughly stable since then. On the balance sheet released today, which was as of March 3 – before the bond QT started – the balance of bonds dropped by €5 billion for the week and by €26 billion from the peak, to €4.96 trillion.
In 2015, the ECB suddenly got infected by the Fed’s virus of buying bonds, and it went hog-wild.
€1 trillion destroyed.
Like all central banks, when the ECB reduces the assets on its balance sheet, it receives money for the loans it had extended and for the securities it had bought, and it then destroys this money in the opposite way in which it had created it.
The ECB has now destroyed €1 trillion, mostly from loan payoffs (€995 billion), and starting to from the bond roll-off (€26 billion), combined a massive amount of liquidity that was drained from the financial system over the past few months – and more than the Fed’s $626 billion in QT.
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