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Using estimates of the Basel III leverage ratio (LR), we show that banks in the euro area were largely in compliance with the preliminary 3 per cent threshold already in 2013 and that they continued improving their ratio up to an average of 4.7 per cent in 2016. Contrary to predictions that the new requirement might interfere with the implementation of monetary policy, the evidence shows that, in a context of extraordinary monetary policy stimulus, this conflict has not materialized. First, the LR discourages participation in central bank refinancing operations only to a very limited extent and for a specific category of banks. Second, the surge in central bank reserves created by the Asset Purchase Programme has not prompted banks to deleverage by reducing other asset classes. Finally, although banks' balance sheets report a decrease in outstanding repos and reverse repos, the overall activity outside reporting dates does not seem to have decreased as much.

Since 2008, excess liquidity - defined as the sum of holdings of central bank reserves in excess of reserve requirements and holdings of equivalent central bank deposits - has tended to accumulate in specific euro area countries and in a small, slowly changing group of credit institutions. Despite the stability of the concentration of excess liquidity in specific countries over time, the relevance of individual drivers has changed. First, risk aversion has played a much smaller role in explaining the concentration since 2013 than it did at the time of "flight-to-quality" phenomena in the period 2010-12. Second, the location of the relevant market infrastructures (i.e. central securities depositories, securities settlement systems and TARGET2 accounts) used by counterparties that sold assets to the Eurosystem has been a more important driver directing flows in the period 2015-16. In addition, the more recent concentration of excess liquidity is explained by the combination of a number of factors, such as banks following strict internal credit limits, investment incentives created by yield differences across the euro area and the "home bias" in euro area government bond holdings. Overall, the net cross-border flows of liquidity that resulted also determined TARGET2 balances. At the individual bank level, when controlling for banks' capital, non-performing loans, credit risk and profitability, excess liquidity holdings in relation to total assets are found to be higher for smaller and better-capitalised banks, and for banking groups with liquidity centralised at the head institution. In addition, participation in Eurosystem longer-term refinancing operations and deposit inflows are associated with liquidity accumulation. Finally, new regulatory initiatives such as the liquidity coverage ratio are explained to be creating incentives to hold or not to distribute liquidity, thereby affecting its distribution.