Doom or no doom? On banks’ rising borrowing from the BOE

Summary

       
• In this Money Market Update I take a detour to the UK, where there has been a marked increase in borrowing by banks from the Bank of England as of late. The optically elevated level of borrowing from the BOE begs the question: are bank reserves less plentiful than one would assume by looking at the absolute level of reserves, or the level of reserves relative to the banking system’s total assets/liabilities?
• Based on a comparison with the banking systems of the US and Eurozone, the level of bank reserves in the UK is the highest of the three and indeed still truly excessive. Thus, borrowing from the BOE probably reflects opportunistic behavior by UK banks. Such borrowing is no sign of reserves scarcity, or even impending reserves scarcity. There is no read-across for the Euro Area in the sense that the ECB is underestimating banks’ demand for reserves. Barring a political blowup in the Euro Area, we will see no strong increases in ECB regular refinancing in September, when the central bank will narrow the corridor between the deposit rate and the main refinancing rate. Eurozone bank demand for reserves will remain low for some time to come. Thus, upward pressure on unsecured rates will remain low and concurrent with the gradual decline in excess reserves stemming from the ECB’s Quantitative Tightening.
• Regarding the opportunistic behavior of banks borrowing from the central bank in an environment of high levels of excess reserves, such behavior is exactly as intended by our central bank overlords in Frankfurt and elsewhere. Following the 2019 US repo market blowup and the 2023 banking panic, our central bank overlords prefer stability above all else, even if that means subsidizing banks borrowing from the central bank.
• Finally, ahead of the elections, UK politicians’ promises to cut the remuneration of bank reserves will have (if enacted of course), an easing effect on money markets, principally a widening of SONIA-Bank Rate. Since there is some marginal demand for reserves, cutting the remuneration could stimulate interbank lending and borrowing.