A quick note on Simon Jenkins’ piece in the Guardian today on where all the Bank of England’s QE cash has gone. He says he can’t find it anywhere but if you take a quick look at the BOE’s weekly balance sheet, or Bank Return as they call it, you’ll get an idea.
1) BOE Bank Return July 11 2007 i.e. before QE.
The “Reserve Balances” is the entry you want to look at, circled in red. It was £17b in 2007 before the financial crisis. Now look at the latest BOE Bank Return.
2) BOE Bank Return July 11 2012 i.e. after QE.
The Reserves Balances have increased to £232 billion. So banks who have been given cash as part of QE, park the excess cash they have at the BOE at the end of each day as Reserve Balances.
However, this does not mean that this cash is not being lent out or used in other ways. All it shows is that there is excess cash in the system. For example, if bank A buys a bond from bank B, Bank B deposits the cash from the transaction as Reserve Balances at the BOE at the end of each day. Or if a bank lends to a small business, the small business might either put that money in the bank or it goes and buys something. In both cases the cash ends up as Reserve Balances at the BOE. The cash only disappears if more the notes and coins are put into circulation (in which case the number “Notes in circulation” will increase) or the cash is stuffed under the mattress etc.
But given the weak lending figures, it is likely that banks are keeping much of this cash as a buffer in case of liquidity shocks, whether they be deposit flight where depositors take their money out the bank or the equilivalent in the interbank markets where banks find it difficult to raise funding in the markets.
This is similar to what is happening in the Eurozone. Until Wednesday banks left their excess cash at the end of each day in the ECB’s deposit facility where they would earn 0.25% interest but the ECB cut the deposit rate at last Thursday’s ECB meeting to 0% (implemented on July 11th) to encourage banks to lend the cash out. As can be seen, funds left in the deposit facility dropped but this cash didn’t just disappear, it turned up as excess reserves on the ECB’s current account holdings. Banks receive the ECB refi rate (now 0.75%) on funds left as current account holdings up to the level of required reserves but nothing for the funds left above that level. So now there’s no reason for banks to move money from the current account to the deposit facility.