The decline in euro area banks' excess reserves has been quite spectacular. Excess reserve levels are back to 2011 levels.
Why are banks paying off their loans? Some have found alternative sources of funding in the private markets (repo or secured bonds for example), but a great number of Eurozone banks are simply deleveraging. As they reduce their assets, they don't need to borrow as much. Sadly, this deleveraging has resulted in extraordinarily weak loan growth, both to households,
|YoY growth in loans to Eurozone households (source: ECB)|
|YoY growth in loans to Eurozone non-financial companies (source: ECB)|
While there are some signs of economic improvements in certain parts of the Eurozone, the deleveraging of the banking system and nonexistent loan growth does not bode well for a near-term recovery.
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