QE cash, where does it end up?

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.

This entry was posted in Bank of England, ECB, Euro Zone, Quantitative Easing, UK and tagged , , , , . Bookmark the permalink.

2 Responses to QE cash, where does it end up?

  1. AndyB says:

    Good stuff but what I want to know is why the Reserves level is not higher. If there has been 325 billion of gilt purchases, that should mean 325 billion of new reserves in the system. As I understand it Reserves added by deficit spending will be drained by Govt issue of gilts pound for pound so I calculate we are missing about 100 billion of reserves. What am I missing ?

    • Nick says:

      Thanks for posting a comment on my blog last week about the Bank of England balance and sorry for my late reply.

      The answer to your question, is as follows.

      Firstly, Reserves aren’t added by deficit spending. This implies that QE is financed by increasing the government’s budget deficit (is that what you meant?). Under QE the BOE’s Asset Purchase Facility buys bonds from the banks and in exchange the BOE increases the balance of their respective accounts held at the BOE. This is the printing money aspect i.e. this is new money not financed by deficit spending. QE is accounted for under a separate balance sheet “the Asset Purchase Facility Balance Sheet” but to finance its purchases it receives a loan from the main BOE balance sheet (the Bank Return) and this is accounted for in the “Other assets” section.

      On the July 11th 2012 statement I copied onto my blog, this was £342,870,590,195, up from £12,081,691,704 on July 11th 2007, which equals a net of £330,788,898,491. According to the Asset Purchase Facility results page, the BOE had purchased £327.925B by this point.

      Also, notice that the BOE is no longer providing liqudity via one week reverse repos. In July 2011, this accounted for £31.8B so QE has replaced this form of financing, so instead of getting liquidity injection via one week repo, banks have been given cash through QE instead. This is why the Total assets of £362B in 2012 minus total assets of £79B in 2007 is less than £325B. Plus the long term reverse repos have fallen by about £9B since then too.

      So that’s where the extra cash was created and accounted for on the asset side of the balance sheet of the BOE. But this must also be accounted for on the liabilities side. The “Reserve balances” section is the obvious main chunk of extra cash, increasing by £220B plus an extra £49B under “Other liabilities” and extra £16.8B in “Notes in Circulation.” This adds up to £285B and is the difference between the size of the balance sheet on July 11th 2007 and July 11th 2012. If you go back further to Jan 2007, the balance sheet was £41B i.e. the BOE balance sheet has increase £325B since then but the increase in the balance sheet in July 2011 was of a different form to QE. The “Other libilities” section includes, among other things, foreign central banks’ holdings of sterling. So UK banks may have sold sterling received from QE to foreign central banks and this is accounted for under “Other liabilities.” It indicates that foreign central bank holdings of sterling have increased.

      Hope that helps.


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