Evidence to date suggests that the ECB’s subsidised loans to banks have been much less effective in delivering monetary stimulus than “conventional” QE as practised by the Bank of England.

A positive impact on the supply of money from such policies depends on the banking system increasing lending to, or buying securities from, non-banks (including governments). Banks “finance” a rise in their assets by crediting the deposit accounts of borrowers or sellers of securities with newly-created money*.

The ECB’s lending to banks via its weekly and longer-term refinancing operations rose by €512 billion between the end of November and the end of March. Bank lending to the non-bank private sector, however, fell by €70 billion over the four months, or €32 billion after seasonal adjustment. The decline, admittedly, might have been even larger without the ECB’s additional loans but it is reasonable to conclude that any positive impact was small.

The ECB’s actions have been much more successful in inducing banks to buy government bonds – purchases totalled €127 billion over December-March following sales of €39 billion in the prior four months. Comparing this buying with the €512 billion increase in ECB lending, however, suggests “pass-through” of only 25%.

Contrast this with the Bank of England’s QE2 operation, involving the central bank buying £125 billion of securities directly rather than relying on banks using officially-lent funds to do so. The monetary impact has been slightly reduced by small-scale bank sales of gilts – £15 billion between October, when QE2 started, and March. This still, however, suggests a monetary boost of £110 billion, implying pass-through of 88%.

The ECB, in other words, would have obtained a much bigger “bang for its buck” – three and half times the impact, based on the above figures – by channeling funds directly into government bonds rather than lending to banks. It could, alternatively, have delivered the same amount of stimulus with a much smaller increase in its balance sheet, thereby preserving ammunition likely to be needed in the event of “Grexit”.

April monetary statistics are released next week but the suspicion is that Eurozone money supply trends remain too weak to promote economic recovery, warranting further policy easing. The view here is that this should take the form of country-neutral QE, i.e. bond purchases spread across markets in proportion to GDP. Such an approach would deliver Eurozone-wide stimulus – helpful for “rebalancing” – while limiting risk to the ECB’s balance sheet and avoiding an inappropriate subsidy to peripheral sovereigns (implied by the operation to date of the “securities markets programme”).

*The “banking system” here refers to the central bank plus commercial banks. To the extent that newly-created money is held by overseas residents or governments, it will not show up in published monetary aggregates, which usually cover only domestic private sector holdings. Subsequent transactions, however, may result in the money being transferred to private residents.