Transcript ECB`s liquidity policy

ECB’s Liquidity Policy
An Update
Gioè Massimo
Lapage Christophe
Contents
1.
Introduction
1.
2.
3.
2.
The Eurosystem
Monetary Policy
Key European Interest Rates
ECB’s Liquidity : Instruments and Objectives
1.
2.
3.
Eurosystem Monetary Policy Operations
Example of Main Refinancing Operation-Allotment
Innovations and Adaptations to the Current Crisis
1.
1.
2.
3.
4.
5.
2.
3.
4.
Impact of ECB’s Innovations
1.
2.
5.
On the Eurosystem Balance Sheet
On the Financial System, and the Real Economy
Fed
1.
1.
2.
3.
6.
Trichet’s Enhanced Credit Support
Fixed Rate Tenders with Full Allotment
Collateral
Lengthening of Maturities of Refinancing Operations
Providing Liquidity in other Currencies
Outright Purchase of Covered Bonds Issued by Banks
Central Banks Cut the Main Interest Rate Together
Additional measures
Bernanke’s Credit Easing – 3 Sets of Tools
Lending to Financial Institutions
Providing Liquidity
Buying Longer-Term Securities
Conclusion
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Eurozone
Source : Wikipedia
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
ECB’s Monetary Policy
“ The primary objective of the ECB’s monetary policy is to maintain price
stability. The ECB aims at inflation rates of below, but close to, 2%
over the medium term.”
Instruments of monetary policy:
- Open Market Operations
- Standing Facilities
- Reserves
Purpose of Instruments:
The central bank manages the liquidity
situation, influences money market
interest rates and gives signals to the
markets.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Key Interest Rates in Europe
‘ The stance of monetary policy, as reflected in short term interbank interest
rate, can obviously be loosen through a decrease in key policy rate or through
a looser liquidity supply, or through a combination of both.’
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Eurosystem Monetary Policy Operations
Source : ECB, Nov. 2008
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Main Refinancing Operation-Allotment
Reference Number: 20080042
Min Rate: 4 %
Transaction Type:
REVERSE_TRANSACTION
Marg. Rate: 4.03 %
Operation Type:
LIQUIDITY_PROVIDING
% of All. at Marg. Rate: 57.9207
Procedure: STANDARD_TENDER
Tot Amount Allotted: 191000 mn
Tender Date: 10/06/2008
Weight. Avg. Allot. Rate: 4.18 %
Start Date: 11/06/2008
Tot Bid Amount: 202780.3 mn
Maturity Date: 18/06/2008
Tot Number of Bidders: 343
Duration (days): 7
Min Rate (bids): 4 %
Auction Type: VARIABLE_RATE
Max Rate (bids): 4.32 %
Allotment Method: MULTIPLE_RATE
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Trichet’s Enhanced Credit Support
In order to respond to the current credit crisis,
the ECB has adopted some new measures : the
so-called ‘non-standard measures’.
Purpose : have private banks lend  to maintain the
availability of credit for households and companies at
accessible rates.
 Boost the economy, as far as the inflation is low.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Trichet’s Enhanced Credit Support
1. Fixed Rate Tenders with Full Allotment
October 2008 – Complete switch from variable to fixed
main refinancing rate.
ECB’s Perspective : The new fixed rate full allotment
tender procedure was designed to ensure the
effectiveness of monetary policy transmission at a time
when borrowing through interbank transactions had
become abnormally elevated for many financial
institutions.
Bank’s Perspective : Thanks to this measure, they face
less competition than before (Dutch auction with
variable rate).
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Longer Term Refinancing Operation-Full Allotment
Reference Number: 20090055
Fixed Rate: 1 %
Transaction Type:
REVERSE_TRANSACTION
% of All. at Fixed Rate: 100
Operation Type:
LIQUIDITY_PROVIDING
Tot Amount Allotted: 442240.5 mn
Procedure: STANDARD_TENDER
Tot Bid Amount: 442240.5 mn
Tender Date: 24/06/2009
Tot Number of Bidders: 1121
Start Date: 25/06/2009
Maturity Date: 01/07/2010
Duration (days): 371
Auction Type: FIXED_RATE
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Trichet’s Enhanced Credit Support
2. Collateral
ECB’s Perspective : The list of asset accepted by
the ECB has been increased.
Bank’s Perspective : Banks have easier access to
loans.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Trichet’s Enhanced Credit Support
3. Lengthening of Maturities of Refinancing Operations
• April 2008 – First 6m operation (still with variable rate)
• June 2009 – First 12m operation (with full allotment and fixed rate)
ECB’s Perspective : ECB has increased the maturity to 6 months and
1 year. They recommend banks to expand their longer-term assets
rather than increase the availability of short-term liquidity… and to
lend more easily to other sectors of the economy.
Bank’s Perspective : Banks can resolve better the mismatch between
the investment side and the funding side of their balance sheets.
This is expected to make their liquidity planning horizon longer and
less uncertain.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Trichet’s Enhanced Credit Support
4. Providing Liquidity in other Currencies, especially
US Dollar and Swiss Franc
• December 2007 – First US Dollar liquidity providing measure
• October 2008 – Expansion toward selected foreign currencies
ECB’s Perspective : ECB’s purpose is to avoid any shortages of
foreign currencies. These operations are arranged via swap
lines with the Federal Reserve and other CB’s.
Bank’s Perspective : They can more easily respond to their
need of foreign currencies, and thus lend more easily to euro
area agents requesting especially US dollar and Swiss Franc.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Trichet’s Enhanced Credit Support
5. Outright Purchase of Covered Bonds Issued
by Banks
Target : Invest €60 billion (= 5% of the outstanding
eligible covered bonds)
ECB’s Perspective : Support the flow of credit
Bank’s Perspective : Covered bonds allow banks to
manage the maturity mismatch between their assets
and liabilities. They find a market again for this
instrument, after the significant losses experienced
during 2008-2009.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Central Banks Cut the Main Interest
Rate Together
• For the first time ever, different central banks
(the ECB, the Fed, the Swiss Central Bank, the
Bank of England and the Bank of Canada)
decided to cut off the main interest rate together
in order to give a big signal to the market.
• Example : October 8th 2008, ECB decided to
decrease the main refinancing interest rates by
0.5% during an unforeseen meeting.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Additional Measures
• Páramo added some measures :
▫ Larger access of counterparties
+ Increased international cooperation
▫ More coordinated actions both for interest rates and
for the provision of liquidity
▫ More information exchanged among major CB’s
• The ECB is acting as lender of last resort. BUT, these
and the following measures are to be considered as
temporary.
Banks cannot rely on it forever !
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Impacts of ECB’s innovations
1. On the Eurosystem
2. On the Financial System, and on the Real
Economy
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
1. Impact of non standard-measures on the
Eurosystem balance sheet
• The size of the Eurosystem balance sheet has
significantly increased. In June 2007, just
before the start of the crisis, total assets of the
Eurosystem amounted to €1,176 billion. By
November 2009, the size has increased by
almost €600 billion.
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
1. Assets
8 June 2007
Gold and gold receivables
Claims on non-euro area residents in foreign currency
Claims on euro area residents in foreign currency
Claims on non-euro area residents in euro
Lending to euro area credit institutions in euro
Main refinancing operation
Longer-term refinancing operations
Marginal lending facility
Other claims on euro area credit institutions in euro
Securities of euro area residents in euro
General government debt in euro
Other assets
Total assets
20 November 2009
179,936
143,867
25,588
15,301
429,174
207,000
150,002
172
14,058
96,176
37,643
234,603
238,147
193,776
41,172
17,071
649,482
53,258
595,401
773
22,058
326,084
36,195
237,490
1,176,346
1,761,476
Source : www.ecb.int
- Full allotment measures are included in the longer-term refinancing operations
- The covered bond purchase program increases the securities assets
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
2. Liabilities
8 January 2007
20 November 2009
Banknotes in circulation
629,296
771,617
Liabilities to euro area credit institutions in euro
185,711
275,891
185,565
229.825
143
46,065
201
413
0
0
51,054
163,603
42,595
155,395
8,459
8,207
20,240
62,084
157
3,589
17,262
9,702
5,578
50,906
72,995
158,458
Revaluation accounts
125,521
192,254
Capital and reserves
68,331
72,959
1,176,346
1,761,476
Current account
Deposit facility
Other liabilities to euro area credit institutions in euro
Debt certificates issued
Liabilities to other euro area residents in euro
General government
Other liabilities
Liabilities to non-euro area residents in euro
Liabilities to euro area residents in foreign currency
Liabilities to non-euro area residents in foreign currency
Counterpart of Special Drawing Rights allocated by the IMF
Other liabilities
Total liabilities
-Banknotes in circulation have steadily increased
- Current accounts and deposit facility have gone up
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
2. Impact of Measures on Financial Markets
and the Real Economy
• M1 – M3 growth rates
• Interbank market
• Access to credit for households and corporations
• Interest rates and yield curve
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Growth of M1 and M3
16
14
12
10
8
Growth of M1
Growth of M3
6
4
2
2000Jan
2000Apr
2000Jul
2000Oct
2001Jan
2001Apr
2001Jul
2001Oct
2002Jan
2002Apr
2002Jul
2002Oct
2003Jan
2003Apr
2003Jul
2003Oct
2004Jan
2004Apr
2004Jul
2004Oct
2005Jan
2005Apr
2005Jul
2005Oct
2006Jan
2006Apr
2006Jul
2006Oct
2007Jan
2007Apr
2007Jul
2007Oct
2008Jan
2008Apr
2008Jul
2008Oct
2009Jan
2009Apr
2009Jul
2009Oct
0
The impact of the monetary base has strongly decreased.
More effort is required to affect the liquidity in the market !
More M1 injection
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Spread between Euribor – 6 months and main refinancing rate
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
The interbank credit market has followed the decrease of the ECB’s main interest
rate after a considerable lag.
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Long-term and short-term interest rates
From flatter (and perhaps negative sloped) to more “normal” yield curves.
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Loans to Non-Financial Corporations and to Household Purchase
(flows in volume)
40000
120000
100000
30000
80000
20000
60000
40000
10000
20000
0
0
-20000
-10000
-20000
Loans to non-financial corporations (Gov. excluded)
Loans to household purchase
-30000
-40000
-60000
-80000
Loans to firms and households decreased, even to negative territory.
Source : www.ecb.int
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Federal Reserve
• Similar overall objectives than ECB, perhaps a
different loss function :
Where β is a measure of the CB’s aversion to π.
• Similar measures adopted
• 3 sets of tools :
▫ Lending to financial institutions
▫ Providing liquidity
▫ Buying longer-term securities
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Federal Funds Target Rate
The Fed adopted an aggressive monetary policy well before the ECB.
Source : www.bloomberg.com
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Bernanke’s Credit Easing (1)
• Group 1
▫ Enlarged the eligibility
▫ Lowered the spread between the discount rate and
the federal funds rate target from 100 to 25 bps
▫ Increased the term of discount window loans
▫ Created the Term Auction Facility
▫ Created Term Securities Lending Facility
▫ Created the Primary Dealer Credit Facility
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Sources of Finance for Corporations
Source : Trichet, 2009
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Bernanke’s Credit Easing (2)
• Group 2 :
▫ Purchased highly rated commercial paper
▫ Provided liquidity for money market mutual funds
▫ Increased collateral
• Group 3 :
▫ Purchased longer term securities
 Example : $100 billion in government-sponsored
enterprise debt
1. Introduction
2. Instruments and objectives
3. Innovations
4. Impact
5. Fed
6. Conclusion
Conclusion
• ECB and Fed both have adopted similar measures which aim to the
same final objective : inject more liquidity in the market.
• The Eurosystem balance sheet has expanded
• Banks don’t seem to lend enough either because they fear high
credit risk or simply because there is low demand from companies
and households.
• Exit Strategies :
▫ Decrease non standard measures
▫ Adjust level of key interest rate
Better a late exit than a premature, but too late would increase the risk of
high inflation in the future.
New challenge for the ECB and the Fed
Thank you for your attention !
Clap clap clap clap clap !!
Bibliography
•
Bernanke B. (13 Jan. 2009), “Beyond the Federal Funds Rate: The Fed's Policy Toolkit”
•
Bini Smaghi L. (19 Nov. 2009), “Monetary Policy in Challenging Times”, London
•
Bofinger, Peter, “ Monetary Policy - Goals, Institutions, Strategies, and Instruments ”, Oxford University Press, 2001, pp.
293 – 367
•
González-Páramo J. M. (10 Nov. 2009), “The Response of the Eurosystem to the Financial Crisis”, Brussels
•
González-Páramo J. M. (9 Sept. 2008), “Some Lessons from the Global Financial Turmoil”, London
•
Trichet J.- C., (13 July 2009), “The ECB’s Enhanced Credit Support”
•
ECB, Monthly Bulletin November 2009
•
ECB (Nov. 2008), “The Implementation of Monetary Policy in the Euro Area”
•
www.federalreserve.gov
•
www.ecb.int
•
www.bloomberg.com
•
www.eurostat.eu