Transcript interest rates - EESC European Economic and Social Committee

European Economic and Social Committee
EUROPEAN INDUSTRY AND MONETARY POLICY
The role of the European Investment Bank
TECHNICAL AND LEGAL ISSUES
DRAFT (To be updated)
November 4th 2015
Starting point
..
Technical and legal issues of a
"Cooperation Agreement" between the ECB
and the EIB through which the EIB would
get involved in the investment decisions on
monetary expansion
Starting point
As said before, this collaboration could be achieved
in different ways:
.. Involvement of the EIB or / and of national
promotional banks or agencies from member states.
.. Involvement of the EIB could be in a substantial part
of the monetary expansion or in a limited amount.
Starting point. Some options
.. Transferring resources to the EIB balance:
a) Directly: ECB loans to the EIB
b) Indirectly: Purchase by the ECB of debt issued by the EIB
..
Without transferring resources to the EIB balance:
Setting up a Fund managed by the EIB but under the
Eurosystem / ECB ownership
Setting up a fund –or an entity- managed and owned
by the EIB
Making use of the EIB expertise through
advice, formal reports or delegation in allocation of
resources.
LEGAL ISSUES
Legal issues
.. Legal capacity of the EIB
..
“Independence of the ECB”: Autonomy of the ECB to define
monetary policy.
..
Geographical scope: Eurozone (ECB) / European Union (EIB)
..
Ability to delegate to the EIB the approval of operations
..
Formalization of the collaboration ECB-EIB
Legal capacity of the EIB
RESOURCES
The EIB can make use of its own resources as well as of capital markets.
ACCOUNT OPENING
As a public entity, the EIB is able to open accounts with the ECB and with
national central banks. (Article 17 of the Statute of the ESCB and of the ECB)
CREDIT OPERATIONS
As a credit institution, the EIB is able to conduct credit operations with other
credit institutions and market participants, with lending being based on
adequate collateral. (Article 18.1 of the Statute of the ESCB and of the ECB)
Legal capacity of the EIB
OPEN MARKET OPERATIONS
Securities issued by the EIB can be acquired by the ECB like those of
any other entity. (Article 18.1 of the Statute of the ESCB and of the
ECB)
OPERATIONS WITH PUBLIC ENTITIES
As a publicly owned credit institution, the EIB is not subject to the
restrictions that apply to other entities with regard to credit operations
or direct purchase of debt by the ECB. (Article 123 (2) of the EU
Treaty and Article 21.3 of the Statute of the ESCB and of the ECB)
Legal capacity of the EIB
IF SOME CHANGES ARE NEEDED:
It is possible that appropriate participation of the EIB in the
implementation of ECB monetary policy could require certain
changes, major or minor, in the operation of the Eurosystem. It is
important to note that, apart from the criteria defined in the Treaty, the
monetary policy of the Eurosystem can be adapted or amended by
the ECB itself.
NOTE:
Section 1.6 of the Guideline of the ECB on monetary policy instruments and procedures
of the Eurosystem (2011/817/EU):
"MODIFICATIONS TO THE MONETARY POLICY FRAMEWORK
The Governing Council of the ECB may, at any time, change the instruments,
conditions, criteria and procedures for the execution of Eurosystem monetary policy
operations“.
Legal capacity of the EIB
..
According to the Article 17 of the Statute of the EIB,
interest rates in the operations of the EIB must be
“linked” to the capital market rates.
..
So, it can be a reason for the collaboration to be
implemented not through the EIB itself but through
an specific found or entity managed by the EIB. In
other case, nearly the whole rates differential
would remain in the EIB itself.
Legal capacity of the EIB
“STATUTE OF THE EIB
Article 17
1. Interest rates on loans to be granted by the Bank and commission and
other charges shall be adjusted to conditions prevailing on the capital
market and shall be calculated in such a way that the income there from
shall enable the Bank to meet its obligations, to cover its expenses and
risks and to build up a reserve fund as provided for in Article 22.
2. The Bank shall not grant any reduction in interest rates. Where a
reduction in the interest rate appears desirable in view of the nature of
the investment to be financed, the Member State concerned or some
other agency may grant aid towards the payment of interest to the extent
that this is compatible with Article 107 of the Treaty on the Functioning of
the European Union."
Legal capacity of the EIB
.. Monetary policy operations feed into the
economy at clearly preferential (“key”) rates.
We need to consider whether or not the
requirement to use market interest rates is
likely to hinder the redirection of resources
generated by monetary expansion operations.
.. Of course, this would not affect resources that
are not included in the EIB's balance sheet.
Independence of the ECB
EU TREATY:
Art. 130: ‘When exercising the powers and carrying out the tasks and duties
conferred upon them by the Treaties and the Statute of the ESCB and of the
ECB, neither the European Central Bank, nor a national central bank, nor
any member of their decision-making bodies shall seek or take instructions
from Union institutions, bodies, offices or agencies, from any government of
a Member State or from any other body. The Union institutions, bodies,
offices or agencies and the governments of the Member States undertake to
respect this principle and not to seek to influence the members of the
decision-making bodies of the European Central Bank or of the national
central banks in the performance of their tasks”
Independence of the ECB
• The purpose of the Independence Principle is to protect
the ECB from governments trying to finance themselves
in an easy way through monetary expansion.
• The purpose of the Independence Principle cannot be
protecting the ECB “from real economy”
Independence of the ECB
• So, we think that:
.. An inappropriate use of the independence principle
should not be accepted
.. The Governing Council of the ECB should not make
use of this principle in an inadequate way
Independence of the ECB
• Our proposal: An adequate interpretation of the “Independence
Principle”, should be limited to the use of monetary expansion to
governments budget financing
• Anyway, “just in case”, for the purpose of this project, we have
accepted, as a basis for the analysis, the restrictive interpretation
of the Independence Principle.
• So, we understand that any decision concerning the management
of monetary expansion or the collaboration with the EIB should be
approved by the ECB
Independence of the ECB
What’s Independence?
Ref.: “Central bank independence under European Union and other international
standards” Robert Sparve. ECB 2005:
- Institutional Independence
- Personal Independence
- Financial Independence
- Functional Independence (on the relationship between NCBs
and the Eurosystem)
Only “Institutional Independence” might be of concern in our case.
Independence of the ECB
INSTITUTIONAL INDEPENDENCE. Some criteria:
-
The right of third parties to approve, suspend, annul or defer
decisions by the NCBs
-
The right to censor decisions on legal grounds and subsequently
submit them to political authorities for final decision
-
The right to be consulted (ex ante) on an NCB’s decisions
-
“The right of representatives of external political authorities to
participate in the decision-making bodies of an NCB with a right to
vote is, even if not decisive, incompatible with the Treaty and the
Statute; no voting rights for such representatives at board meetings
may be acceptable”.
Independence of the ECB
MAIN CONCLUSION
-
There might be some doubts if the collaboration between EIB and ECB is channeled
through some kind of “delegation” in the EIB to take decisions on funds created
through monetary expansion
-
But:
- “Delegate” is not the same as give “a right to participate in the decision
making- bodies”
- EIB is not a “political authority”
- Delegating some decisions on an specific fund is not the same as “to
participate in the decision-making bodies”.
Anyway: JUST IN CASE, the limits of the delegation capacity of the ECB in the EIB
concerning investment decisions should be specifically analysed.
Ability to delegate in the EIB the approval of
operations
• There may be some doubts about the ability of the ECB to delegate
the approval of operations
• But there are different ways to solve this issue:
.. Ratification “a posteriori” of the operations approved by
the EIB
.. Operations approved by EIB don´t concern ECB funds but
funds provided by the ECB to an specific entity (perhaps a
subsidiary of the EIB)
Ability to delegate in the EIB the approval of
operations. OPTION A
ECB
Fund without
legal
personality
(ECB Assets)
Funding
EIB
Ability to delegate in the EIB the approval of
operations. OPTION B
ECB
Loans at
key interest
rates
EIB
New entity
or
subsidiary
Ability to delegate in the EIB the approval of
operations. OPTION C
ECB
Loans at
key interest
rates
EIB
If EIB capital is not enough:
.. an specific reserve fund
could be created
.. in some cases, financed by
the differential in interest rates
Geographical scope
..
The eurozone is the geographical scope of the ECB.
Obviously, EIB involvement in implementing monetary
policy should not modify this.
..
Once
the
mechanisms
of
cooperation
are
sufficiently established, the EIB could decide to
set up a section or subsidiary specifically for this
purpose, whose activity would be limited to the
eurozone. (Article 28 of the Statute of the EIB)
..
Monitoring of this section or subsidiary would
be
assigned to an specific committee consisting of
representatives of the eurozone members.
TECHNICAL ISSUES
SOME TECHNICAL ISSUES
..
Constrained credit demand
..
Technical capacity of the EIB
..
Key differences in investment policies
between ECB and EIB
..
Risk concentration
Constrained credit demand. To
which point?
CHANGES IN DEMAND FOR
LOANS OR CREDIT LINES TO
ENTERPRISES
(net percentages of banks
reporting positive
demand)
SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015
Constrained credit demand. To
which point?
PURPOSES FOR WHICH EURO AREA BANKS USE THE ADDITIONAL
LIQUIDITY FROM THE EXPANDED APP (average percentage of
respondents per category) SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015
Constrained credit demand. To
which point?
PURPOSES FOR WHICH EURO AREA BANKS USE THE ADDITIONAL
LIQUIDITY FROM THE EXPANDED APP. GRANTING LOANS
(percentage of respondents) SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015
Constrained credit demand. To
which point?
USE OF FUNDS FROM THE PAST AND FUTURE TLTROs
(percentage of respondents) SOURCE: ECB. BANK LENDING SURVEY JULY 2015
Constrained credit demand. To
which point?
..
According to the ECB data, it looks like credit
demand is increasing and is expected to increase
..
In a significant part, banks are using the additional
liquidity from the TLTRO and the APP programmes
to granting loans to enterprises. So, enterprises do
need it.
..
Anyway, even in a context of constrained credit, it
would not be a reason against the collaboration
between EIB and ECB. It is not a temporary shortterm issue.
Technical capacity of the EIB (I)
..
Very specially, in the context of EIB commitments related
to the Juncker Plan. To which point can EIB expand its
capacities for the management of new funds?
..
The issue is not EIB capacity but the joint capacity of EIB
+ National promotional banks and agencies.
..
We are not in a short-term issue. Capacities can be
expanded in a progressive way.
..
Anyway, investment capacities of an expanded EIB would
be, in any case, stronger than ECB capacities to allocate
resources to real economy.
Technical capacity of the EIB (II)
..
If necessary, EIB can also work as an advisor for a
better link of ECB operations to real economy
..
If necessary, EIB can work in a similar way as ECB:
Just providing liquidity to banks, but establishing
the necessary conditions to ensure their
destination to real economy.
Key differences in investment
policies
..
Depending on the position taken by the EIB in the
collaboration with the ECB, we should compare its
investment policies with the ECB policies or with
the policies of the private banks that receive funds
from the ECB.
..
Of course, taking into account that policies
developed in the framework of the ECB-EIB
collaboration should not necessarily be the same
as the usual ones in these institutions.
Key differences in investment
policies
If we compare ECB and EIB policies …
ECB
EIB
LIQUIDITY
High
Low
TERM
Short - Medium
Medium - Long
INTEREST
RATES
Far lower than
retail market
Close to retail market
CREDIT RISK
Usually lower
(Banks,
Securities)
Usually higher
(SMEs, Banks, Public
banks)
RISK
ABSORPTION
.. ECB
.. Monetary risk
.. Fiscal risk
.. EIB (or EIFund)
.. Fiscal risk
Key differences in investment
policies
But if we compare EIB and private banks policies …
PRIVATE BANKS
EIB
LIQUIDITY
Low
Low
TERM
Medium - Long
Medium - Long
INTEREST
RATES
Retail market
Close to retail market
CREDIT RISK
Usually higher
(Businesses, Households,
Securities, …)
Usually lower
(SMEs, Banks, Public
banks)
.. Own balance sheet
.. EIB (or EIFund)
.. Fiscal risk
RISK
ABSORPTION
Risk absorption
..
If risk falls on the EIB, its capital would be a
very strict limit for the collaboration.
..
But, as we know, the point is not EIB but EIB
+ National Promotional Banks and Agencies.
..
But, as we have seen, in an “expanded
EIB”, differentials in interest rates could
allow to compensate this risk through an
specific reserve fund.
Risk absorption
..
If risk falls on the ECB / Eurosystem,
delegation in the EIB would have to be
agreed. But, as we have seen, there are
different ways for this.
Risk policy
.. “Central banks cannot bankrupt”. Why?
.. If necessary, ECB can pay its debts just issuing new
currency.
.. ECB debts are not debts against the ECB itself but
rather against the European economy.
.. So, risks accepted by central banks use to be
“monetary” risks, affecting the value of the currency.
Risk policy
.. However, the European monetary sistem is a
“mixed” one.
.. Risks taken by national central banks are not
“monetary” risks but “fiscal” risks. Their deficits
cannot be covered by currency emission. If
resources
are
needed,
their
respective
government should provide them.
Eurosystem. Loss absorption capacity in
European central banks.
(billions €) 2013
CREDIT RISK
Credit risk in ECB expansionary policies is
usually lower than risk in EIB loans.
(Usually, through collateralized loans to banks)
The point is WHY?
CREDIT RISK
.. Two main reasons:
a) The image / reputation factor
It is understood that the reputation of the ECB solvency is key
for the reputation of the Euro itself.
b) The “risk-sharing” factor
.. Monetary risk falls on the entire Eurozone.
.. Fiscal risk may fall on the entire Eurozone or on member
states.
CREDIT RISK
.. The differential in credit risk can be compensated:
-
Through the differential in interest rates.
-
Through lower risks in ECB operations not
linked to the EIB
Guarantee
..
On the other hand, if EIB activity is limited
to "managing" funding owned by the ECB
or the Eurosystem, the risk is borne by the
Eurosystem itself, even if the decisions are
taken by the EIB.
..
In this case, the EIB could follow the
necessary criteria for defining asset quality.
EIB-EIF. Credit Rating
Fitch
Moody’s
Standard
& Poor’s
Long term
AAA
Aaa
AAA
Short term
F1+
P-1
A-1+
If necessary, EIB also knows how to
work through banks
BREAKDOWN OF OBLIGORS 2013
Source: Fitch / EIB. Based on the ultimate obligor
EIB also knows how to work with
banks in a very secure way:
DEGREE OF PROTECTION IN CREDIT TO BANKS 2013
Source: Fitch
Liquidity risk
..
Many Eurosystem operations “were” short-term.
The 2011-2012 LTRO was
based on three
year and the TLTRO on 4 year maturities. Under
the new APP programme the maximum maturity is
30 years.
..
EIB operations are usually for a longer term than
the operations of the Eurosystem “were” before
the crisis.
Looking at the portfolio of funding maturity on
31.12.2013, it is clear that a large proportion
of EIB loans mature in over five years.
Liquidity risk
APP Programme.
Bonds average maturity: 8 years
Source: ECB / BBVA Research
ECB Long term operations,
more and more important
Source:
Nomura / ECB
ECB Long term operations,
more and more important
EUROSYSTEM ASSETS 10.30.2015. Millions €
OTHER ASSETS
GOVERNMENT DEBT
SECURITIES (INCLUDING APP)
OTHER CLAIMS ON CREDIT …
LTRO
MRO
CLAIMS ON NON-EURO AREA…
CLAIMS IN FOREIGN CURRENCY
GOLD AND GOLD RECEIVABLES
0
400000
800000
Source: ECB. Consolidated financial statement of the Eurosystem as at May 29th 2015
1200000
Liquidity risk
..
Management of monetary policy may require an easier
asset liquidity for the purposes of restrictive strategies.
..
This would mean:
a) Investing in shorter terms or …
b) Investing in easy to liquidate assets (securities)
..
Liquidity standards may be difficult to fit by direct loans to
SMEs.
Liquidity risk
..
For the ECB, this higher liquidity can be reached just buying
bonds that EIB or other institutions transform into loans.
..
If necessary, the higher liquidity risk could be compensated
through lower liquidity risks in ECB operations not linked to the
EIB.
..
Anyway, from the point of view of containing inflation, less
liquidity in EIB operations can be clearly compensated by the
impact of these investments in growth.
On “risk-sharing”
.. Asset Purchase Program:
-
20% shared risk
80% risk in the national central banks
.. Unless a different agreement is achieved, the
agreed level of risk sharing should be applied or
taken into account.
On “risk-sharing”
.. For that purpose, member states could also get
involved in decisions / risks taken, through
different options.
.. A very clear option would be involving public
promotional banks or agencies in member states.
Interest rates
.. Key interest rates are, by themselves, main tools
for expansionary or restrictive monetary policies.
.. In theory, providing lower interest rates for
productive investments identified by EIB could be
by itself a way to promote a stronger relationship
between monetary expansion and industry or real
economy.
Interest rates
.. EIB: close to retail rates.
.. ECB: “key” interest rates. (Or government bonds
rates in APP Programme)
.. So, could it be an opportunity to provide real
economy not only with more funds but also with
lower rates?
Interest rates
.. Because of the AAA rating of EIB, ECB key interest
rates are not always lower than other alternative
funding for EIB.
.. But if the EIB tries to significantly expand its
resources, the rates differential would progressively
increase.
Interest rates
.. If necessary, EIB could make use of its balance sheet
for ECB funds only in the amount compatible with
the AAA qualification (and with cheaper funding),
and make use of a separate fund or entity for the
rest of the ECB funds.
Interest rates
THEORETICAL OPTIONS
A. Make use of key interest rates
B. Make use of rates close to retail market
C. Intermediate rates
Possible criterion: Starting from key rates, elevate
them as necessary to compensate for credit risk.
Interest rates
.. Another option: The Eurosystem / ECB
compensates credit risk of the operations
channeled through collaboration with EIB –directly
focused to real economy- with higher interest
rates in the rest of the operations.
Final remarks
So:
.. there are different ways to make compatible or
solve the differences in maturity, liquidity, risk and
usual interest rates of EIB and ECB
.. if appropriate, new maturity and risk criteria could
be established by the EIB-ECB Agreement for the
purposes of managing these resources, different
from the usual EIB and the usual ECB criteria.
Final remarks
.. Apart from the considerations before, it looks like, from a
macroeconomic point of view, credit focused in real
productive economy should be privileged by the
Eurosystem, both in accesibility and in interest rates. These
criteria should be taken into account when defining the
collaboration between EIB and ECB.
Final remarks
.. It looks like the main legal and technical issues concerning
the different options for the structural collaboration
between ECB and EIB can be easily solved.
..
The concretions and technical options should be analysed
and agreed between ECB and EIB.
..
These positions / criteria will be adapted as the Project
goes on, according to the institutional positions and the
evolution of the analysis.
Thank you for your attention