Email from JJ Lando, now at Nomura:

“THE LTRO DIDN’T DO ANYTHING. ALL THE MONEY WOUND UP AS DEPOSITS AT THE ECB” “QE DIDN’T DO ANYTHING. ALL THE MONEY BECAME EXCESS RESERVES BACK AT THE FED.”
(Apologies in advance to all who have heard me give this one ten times before)

1. Central Banks, whenever they buy any asset (eg lend eg grow balance sheet) create new reserves.

2. Commercial banks and people do NOT have the capacity to destroy those reserves. Once the Fed or ECB wires the money or creates that asset line item on its spreadsheet, there is an equal and offsetting liability on its spreadsheet called reserves. This spreadsheet cannot be broken.

3. All that commercial banks can do is lending, which moves some of those reserves from ‘excess’ to ‘required’ but they are still there.

4. Commercial Banks make this lending decision based upon regulatory capital and profit motives, not based upon reserves. They have a ‘captive audience’ in their Central Banks, who MUST create the necessary reserves (a floored amount) to prevent interest rates from going to infinity.

5. When a Central Bank does a lot of Balance Sheet expansion in a short time, it’s going to wind up as deposits/excess NO MATTER WHAT. If the Fed does 1T of QE, Banks don’t suddenly ‘find’ the regulatory capital to make 10T of loans. And even if they did, there would be the SAME AMOUNT OF TOTAL RESERVES.

6. Bank lending to a 0% risk weighted sovereign actually does NOTHING to diminish excess reserves.

7. Simplified Illustration: ECB does a very large unsterilized LTRO. They take a lot of sov paper on balance sheet (temporarily), and they wire NEW FUNDS to thie member banks. Those member banks take some of the money and buy paper from the ITalian government. That government spends the money by wiring it to its pensioners. Those pensioners take it to buy food from the local grocer. The local grocer DEPOSITS IT IN HIS BANK. SOMEWHERE DOWN THE CHAIN the money winds up on deposit in some member bank, be the chain long or short. WHATEVER MONEY THE ECB CREATES WINDS UP ON DEPOSIT IN ITS MEMBER BANKS, WHETHER OR NOT IT IS ‘USED’ TO BUY SOVEREIGN DEBT, ‘USED’ TO MAKE LOANS, OR NOT USED AT ALL.

8. Please. I never wish to read again that ‘Central Bank money went unused because it wound up as deposits.’ IT HAS NO WHERE ELSE TO GO. THE BANKING SYSTEM IS A CLOSED LOOP. With the possible exception of someone making a withdrawal, taking the paper, and making a bonfire (actually not feasible in the hundreds of billions anyway bec there are constraints)

9. And that is probably how Italy just managed to borrow at 1.64%
Good luck!