Operation LTO Already a Failure?

The European Central Bank conducted their rap for cash 3 year loan repo operation earlier this week in the "hopes" that the banks would take the 1% loan and buy sovereign debt from countries like Italy. In fact a few days ago I posted how Italy had lied saying their banks would use the money to buy Italian debt, but after the operation, the Italian banking regulators said t would be illegal for them to do so.

In an ironic twist of fate, the ECB actually ended up with $40 billion in Italian BTPs which were posted as LTRO collateral by the banks, but even more stinging is the latest ECB Deposit Facility numbers. The Deposit Facility, where banks park cash at the ECB as a safe haven (like we saw earlier in the week with the US Treasury issuing 4 week paper at 0.00% interest with 9x more potential buyers then paper for auction as banks rush to the safety of the treasury, even if it yields 0%) saw an increase of $82 billion the day after the LTRO was conducted, that's a lot of the LTRO money which netted out to be $220 billion, this is the worst possible outcome for the ECB's hopes in conducting the LTRO and was predicted by everyone. The newly deposited LTRO funds also brought the ECB's deposit facility to a new 2011 record high of $347 billion dollars ($82 billion came right after the LTRO-coincidence?).

Here's what the Deposit Facility Balance looks like now...

The unintended consequences of monetary policy, no lending, no buying of sovereign debt, no thaw of the liquidity freeze- just banks trying to protect their newly found free money from the probable collapse of counter party banks.