European Central Bank publishes working paper finding euro area bank liquidity dependence concentrated in the 2015–2017 Asset Purchase Programme phase

The European Central Bank published a working paper examining whether extensive Eurosystem liquidity injections over the past 15 years may have made euro area banks more dependent on central bank liquidity by changing their deposit mix. Using aggregate and bank-level data, the paper finds evidence that banks’ holdings of excess reserves were associated with higher demand deposits and lower time deposits during parts of the liquidity expansion phase, with limited reversal as aggregate liquidity later declined, but only in specific low and stable interest-rate periods. The strongest effects appear in January 2015 to December 2017, when balance sheet expansion was driven mainly by outright purchases under the Asset Purchase Programme (APP). In that period, a 10% exogenous increase in a bank’s excess reserves is associated with a 4.3% increase in demand deposits and a 1.6% decrease in time deposits, while similar patterns are not found during the pandemic expansion under the Pandemic Emergency Purchase Programme (PEPP). Splitting reserves by source links the demand-deposit increase primarily to non-borrowed reserves (consistent with asset purchases), while borrowed reserves (from refinancing operations) are associated with reductions in time deposits. The paper also reports that the increased liquidity exposure is driven mainly by more fragile banks and that effects for the euro area are milder than those documented for the United States. The paper highlights implications for reserve-demand assessment and liquidity-risk monitoring as the Eurosystem continues reducing excess liquidity, and notes that limited observations in the balance sheet reduction phase argue for continued monitoring and potential operational framework recalibration.