As suggested in a post last week, the second ECB three-year LTRO had a much larger impact on bank reserves than the first such operation in December, despite gross lending being only moderately higher. Banks’ current account and deposit facility balances at the ECB rose by €341 billion or 60% in the week to Friday versus a €165 billion or 32% increase in the week to Friday 23 December, following the first three-year LTRO on 21 December.

Total bank reserves in the US, Japan, Eurozone and UK, therefore, rose by $395 billion or 13% last week to a new record 10% above the prior weekly closing high on 23 December – see chart.

The further increase suggests near-term liquidity support for markets but reserves may now plateau. The US component has been flatlining since QE2 ended in June and may decline if an easing of financial market tensions reduces foreign demand for the Fed’s dollar swap loans. Eurozone reserves will probably drift lower as banks use part of the cash borrowed in the three-year LTROs to repay shorter-term loans as they fall due. Japanese and UK reserves should rise as a consequence of ongoing QE operations (although the former, strangely, have fallen recently) but may not offset a US / Eurozone decline.

Can markets keep rising without additional infusions of central bank cash? Fed Chairman Bernanke last week downplayed talk of further stimulus but QE3 would return to the table in the event of US economic data disappointing, as seems possible – see Friday’s post. A liquidity boost, however, might be delivered only after a market correction sufficiently scary to suppress opposition to further monetary experimentation.