"In fact a deposit rate
cut will likely drain liquidity from the Euro area banking system and
accelerate the early repayment of LTRO funds. Negative interest rates on
deposits incentivize banks to “get rid” of their excess deposits rather than
suffer an erosion of capital. But the amount of reserves in the system can only
be changed if Euro area banks decide to collectively reduce their reliance on
the ECB. If a commercial bank makes a loan or buys a bond to avoid negative
rates, they simply pass reserves on to another bank, which ultimately end up
back at the ECB. As such, excess reserves would become something of a ‘hot
potato’, with no bank wanting them at the end of the day. Core banks are more
susceptible to negative deposit rates. Core banks have €620bn of deposits and
have borrowed €190bn (gross) from the ECB. In other words they are collectively
“long cash” by around €430bn (€620bn – €190bn). In contrast peripheral banks
are “short cash” by €650bn."
