European Depositors Don't Take Fright from Cyprus

At the end of last week, the ECB reported that bailing in of Cypriot depositors did not scare other euro zone depositors. In fact, the ECB noted that deposits rose in March across the region, including in countries that have been suggested as potential candidates for the next aid package, including Slovenia, Malta, and Luxembourg.

Cyprus was the only country that experienced a decline in deposits, with 2.4 bln euros of non-bank deposits leaving. The decline in Cypriot deposits since the Greek PSI appears to have been largely a function of non-residents fleeing. Deposits from domestic residents fell 3.1%, but those from other euro area residents fell nearly 13%. Deposits from the rest of the world fell more than 9%.

French banks reported a 16 bln euro increase in deposits. Italian banks reported almost a 20 bln euro increase in deposits and Spanish banks saw deposits rise by 8 bln euros in March. These funds appeared to have be largely recycled into government bonds. In March, Italian banks bought 11 bln euros of sovereign bonds and Spanish banks bought 16 bln euros of sovereign bonds.

In Q1 as a whole, Spanish and Italian banks boost their government bond holdings by 30 bln euros each. French banks increased their government bond holdings by 16 bln euros.

Spain's two largest banks have returned 53 bln euros of LTRO borrowings to the ECB according to last week's earnings reports. Italian banks have reportedly returned very little of their borrowings.

Even though Bankia's transfer of much of its non-performing loans to the "bad bank", Spanish banks earnings generally saw increases in NPLs. Since the end of the housing market bubble in late 2006, NPLs have generally trended higher.

In contrast, Italy did not experience a housing bubble and hence no collapse in property prices. However, the economic weakness, rising unemployment and strains on small and medium size businesses have contributed to rising NPLs in Italy. The most recent data for Italy is from February. The Italy's banking association, ABI, reported earlier this month that NPLs rose to 127.7 bln euros in February, an 18.6% rise from a year ago. Italy's largest banks report earnings starting next week.