V Meeting of Open Market Operators Joaquim Martinez da Silva Markets and Reserve Management Department Buenos Aires, 15-16 April 2010 1
Objective of the ESCB (Eurosystem) Article 105 of the Treaty establishing the European Community: I. The primary objective of the ESCB (Eurosystem) shall be to maintain price stability. Without prejudice to the objective of price stability The ESCB (Eurosystem) shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2. 2
The European System of Central Banks(ESCB) /Eurosystem Article 1 The European System of Central Banks 1.1. The European System of Central Banks (ESCB) and the European Central Bank (ECB) shall be established in accordance with Article 8 of this Treaty; they shall perform their tasks and carry on their activities in accordance with the provisions of this Treaty and of this Statute. 1.2. In accordance with Article 107(1) of this Treaty, the ESCB shall be composed of the ECB and of the central banks of the Member States ('national central banks'). The Institut monétaire luxembourgeois will be the central bank of Luxembourg. 3
THE MONETARY POLICY INSTRUMENTS Standing Facilities Open market operations Reserve requirements Deposit facility (Rates generally lower than market rates) Marginal lending facility (Rates generally higher than market rates) Main refinancing operations (Maturity: one week) Longer-term refinancing operations Fine-tuning operations Structural operations RESERVE BASE Deposits, debt secutities and money market paper RESERVE RATIO 2% for the majority of the items to which the rserve base applies REMUNERATION Reserve holdings will be remunerated at the Eurosystem s rate on its main refinancing operations COMPLIANCE ON AVERAGE 4
COUNTERPARTIES FOR MONETARY POLICY OPERATIONS Deposit facility Marginal lending facility Main refinancing operations Longer-term refinancing operations Fine-tuning operations Structural operations ALL CREDIT INSTITUTIONS WHICH COMPLY WITH RESERVE REQUIREMENTS AND THE OPERATIONAL CRITERIA OF THE CENTRAL BANK ONLY A SMALL NUMBER OF CREDIT INSTITUTIONS, IN PARTICULAR THE MOST ACTIVE ONES IN THE MONEY MARKET DEPENDS ON THE TYPE OF THE OPERATION 5
ELIGIBLE ASSETS FOR MONETARY POLICY OPERATIONS A WIDE RANGE OF ELIGIBLE ASSETS: Central government securities Regional government securities Uncovered bank bonds Covered bank bonds Corporate Bonds Asset-backed securities Securities issued by international entities Non-marketable assets, namely, credit claims 6
THE EFICIENCY OF MONETARY POLICY IMPLEMENTATION 7.000% 6.000% 5.000% 4.000% 3.000% 2.000% 1.000% 0.000% EURO: EONIA, Main Refinancing Operations rates and Standing Facilities rates: January 1999 - December 2006 EONIA Main Ref.Op. Deposit Facility Marginal Lending Facility 04 / Jan / 99 04 / Jun / 99 04 / Nov / 99 04 / Apr / 00 04 / Sep / 00 04 / Feb / 01 04 / Jul / 01 04 / Dec / 01 04 / May / 02 04 / Oct / 02 04 / Mar / 03 04 / Aug / 03 04 / Jan / 04 04 / Jun / 04 04 / Nov / 04 04 / Apr / 05 04 / Sep / 05 04 / Feb / 06 04 / Jul / 06 04 / Dec / 06 7
THE EFICIENCY OF MONETARY POLICY IMPLEMENTATION 6.000% EURO: EURIBOR and Main Refinancing Operations rates: January 1999 - December 2006 Main Ref. Op. Euribor 1 month Euribor 3 months Euribor 6 months Euribor 12 months 5.000% 4.000% 3.000% 2.000% 1.000% 0.000% 04 / Jan / 99 04 / Jun / 99 04 / Nov / 99 04 / Apr / 00 04 / Sep / 00 04 / Feb / 01 04 / Jul / 01 04 / Dec / 01 04 / May / 02 04 / Oct / 02 04 / Mar / 03 04 / Aug / 03 04 / Jan / 04 04 / Jun / 04 04 / Nov / 04 04 / Apr / 05 04 / Sep / 05 04 / Feb / 06 04 / Jul / 06 04 / Dec / 06 8
THE START OF THE TURMOIL- 2007 The turmoil in financial markets was originated from the US sub-prime mortgage market and has implied the loss of confidence among credit institutions. So, the credit institutions with excess of liquidity prevented themselves to finance other credit institutions with liquidity needs. Within hours of the liquidity drying up in the euro money market on the morning of 9 August, the Eurosystem reacted by providing 95 billion of euros of additional liquidity to the market at its policy rate of 4% in a fine-tuning operation with overnight maturity, which was the largest volume that had ever beenallotted in a fine-tuning operation up until that date. 9
THE START OF THE TURMOIL- 2007 6.000% EURO: EONIA, Main Refinancing Operations rates and Standing Facilities rates: January 2007 - August 2007 EONIA Main Ref.Op. Deposit Facility Marginal Lending Facility 5.000% 4.000% 3.000% 2.000% 1.000% 0.000% 02 / Jan / 07 17 / Jan / 07 01 / Feb / 07 16 / Feb / 07 03 / Mar / 07 18 / Mar / 07 02 / Apr / 07 17 / Apr / 07 02 / May / 07 17 / May / 07 01 / Jun / 07 16 / Jun / 07 01 / Jul / 07 16 / Jul / 07 31 / Jul / 07 15 / Aug / 07 30 / Aug / 07 10
THE START OF THE TURMOIL- 2007 Spread between EURIBOR and EUREPO rates on 3 months maturity: January 2007 - August 2007 Spread Euribor 3 months Eurepo 3 month b.p. 5.250% 4.750% 4.250% 3.750% 3.250% 2.750% 2.250% 200 180 160 140 120 100 80 60 40 20 0 02 / Jan / 07 17 / Jan / 07 01 / Feb / 07 16 / Feb / 07 03 / Mar / 07 18 / Mar / 07 02 / Apr / 07 17 / Apr / 07 02 / May / 07 17 / May / 07 01 / Jun / 07 16 / Jun / 07 01 / Jul / 07 16 / Jul / 07 31 / Jul / 07 15 / Aug / 07 30 / Aug / 07 11
THE START OF THE TURMOIL- 2007 millions of euro 1,200,000 1,000,000 800,000 600,000 Liquidity supply through Open Market Operations and Standing Facilities: January 2007 - August 2007 Main Ref.Oper. LTRO 3 months LTRO 12 months Fine-tunning - absorption of liquidity Deposit Facility Ref. Oper. 1 month LTRO 6 months Fine-tunning - injection of liquidity Marginal lending Facility Net Balances 400,000 200,000 0-200,000-400,000 01 / Jan / 07 16 / Jan / 07 31 / Jan / 07 15 / Feb / 07 02 / Mar / 07 17 / Mar / 07 01 / Apr / 07 16 / Apr / 07 01 / May / 07 16 / May / 07 31 / May / 07 15 / Jun / 07 30 / Jun / 07 15 / Jul / 07 30 / Jul / 07 14 / Aug / 07 29 / Aug / 07 12
MEASURES TAKEN BY THE EUROSYSTEM UNTIL THE END OF 2007 Providing liquidity through fine-tuning operations whenever the overnight interest rate increased to much higher levels than the reference rate (which is the minimum bid rate). Providing liquidity earlier in the reserve maintenance period, while the average daily excessof reserves has been maintained in levels close to zero. To achieve the previous target, the Eurosystem conducted liquidityabsorbing fine-tuning operations whenever downward pressures on the overnight rate were observed. 13
MEASURES TAKEN BY THE EUROSYSTEM UNTIL THE END OF 2007 Suplementary longer-term refinancing operations with a maturity of three months were carried out. The total amount of refinancing provided via LTROs increased from 150 billion of euros to 265 billions of euros, while the size of the MROs decreased correspondingly from around 300 billions of euros to bellow 200 billion of euros. Provision of US dollars with a maturity of one month (in connection with the US dollar Term Auction Facility) against collateral eligible for Eurosystemcredit operations. 14
MEASURES TAKEN BY THE EUROSYSTEM UNTIL THE END OF 2007 6.000% EURO: EONIA, Main Refinancing Operations rates and Standing Facilities rates: January 2007 - December 2007 EONIA Main Ref.Op. Deposit Facility Marginal Lending Facility 5.000% 4.000% 3.000% 2.000% 1.000% 0.000% 02 / Jan / 07 17 / Jan / 07 01 / Feb / 07 16 / Feb / 07 03 / Mar / 07 18 / Mar / 07 02 / Apr / 07 17 / Apr / 07 02 / May / 07 17 / May / 07 01 / Jun / 07 16 / Jun / 07 01 / Jul / 07 16 / Jul / 07 31 / Jul / 07 15 / Aug / 07 30 / Aug / 07 14 / Sep / 07 29 / Sep / 07 14 / Oct / 07 29 / Oct / 07 13 / Nov / 07 28 / Nov / 07 13 / Dec / 07 28 / Dec / 07 15
MEASURES TAKEN BY THE EUROSYSTEM UNTIL THE END OF 2007 Spread between EURIBOR and EUREPO rates on 3 months maturity: January 2007 - December 2007 Spread Euribor 3 months Eurepo 3 month b.p. 5.250% 4.750% 4.250% 3.750% 3.250% 2.750% 2.250% 200 180 160 140 120 100 80 60 40 20 0 02 / Jan / 07 17 / Jan / 07 01 / Feb / 07 16 / Feb / 07 03 / Mar / 07 18 / Mar / 07 02 / Apr / 07 17 / Apr / 07 02 / May / 07 17 / May / 07 01 / Jun / 07 16 / Jun / 07 01 / Jul / 07 16 / Jul / 07 31 / Jul / 07 15 / Aug / 07 30 / Aug / 07 14 / Sep / 07 29 / Sep / 07 14 / Oct / 07 29 / Oct / 07 13 / Nov / 07 28 / Nov / 07 13 / Dec / 07 28 / Dec / 07 16
MEASURES TAKEN BY THE EUROSYSTEM UNTIL THE END OF 2007 millions of euro 1,200,000 1,000,000 800,000 Liquidity supply through Open Market Operations and Standing Facilities: January 2007- December 2007 Main Ref.Oper. LTRO 3 months LTRO 12 months Fine-tunning - absorption of liquidity Deposit Facility Ref. Oper. 1 month LTRO 6 months Fine-tunning - injection of liquidity Marginal lending Facility Net Balances 600,000 400,000 200,000 0-200,000-400,000 01 / Jan / 07 16 / Jan / 07 31 / Jan / 07 15 / Feb / 07 02 / Mar / 07 17 / Mar / 07 01 / Apr / 07 16 / Apr / 07 01 / May / 07 16 / May / 07 31 / May / 07 15 / Jun / 07 30 / Jun / 07 15 / Jul / 07 30 / Jul / 07 14 / Aug / 07 29 / Aug / 07 13 / Sep / 07 28 / Sep / 07 13 / Oct / 07 28 / Oct / 07 12 / Nov / 07 27 / Nov / 07 12 / Dec / 07 27 / Dec / 07 17
MEASURES TAKEN BY THE EUROSYSTEM IN 2008 AND THE FAILURE OF LEHMAN BROTHERS Before the failure of Lehman Brothers, operations with maturities of six months were conducted and operations in US dollars with maturities of 84 days were introduced (in addition to the ones with 28 days maturity. The Governing Council, after having increased the reference rate by 25 basis points to 4.25%, on 3rd July, and after the failure of Lehman Brothers, has decided to decrease it up to 2.50%. In addition, between 9 October 2008 and 20 January 2009, the corridor set by the standing facilities was reduced from 200 basis points to 100 basis points. 18
MEASURES TAKEN BY THE EUROSYSTEM IN 2008 AND THE FAILURE OF LEHMAN BROTHERS Application of a fixed rate full allotment procedure in all open market operations main refinancing operations and longer-term refinancing operations (both the usual ones and the suplementary operations with three and six months maturities). Introduction of an additional financing operation with a special maturity, equivalent to the length of the maintenance period (the so-called specialterm refinancing operation) 19
MEASURES TAKEN BY THE EUROSYSTEM IN 2008 AND THE FAILURE OF LEHMAN BROTHERS Provision of US dollar liquidity through operations with maturities of seven days and thereafter with overnight maturity, in addition to the existing 28- day and 84-day operations. Provision os US dollar liquidity through swaps EUR/USD foreigh exchange swaps. Provision of Swiss franc liquidity through a swap line agreed with the Swiss National Bank, initially with a seven-day maturity only, but latter also with a three-month maturity. 20
MEASURES TAKEN BY THE EUROSYSTEM IN 2008 AND THE FAILURE OF LEHMAN BROTHERS The expansion of the list of eligible assets acceptable to guatantee the Eurosystemcredit operations as follows: The credit threshold for marketable and non-marketable assets was lowered from A- to BBB-, with the exception of asset-backed securities, for which the credit quality threshold of A- remained in force. Acceptance of marketable debt instruments issued in euro area and denominated in US dollars, pounds sterling and Japanese yen, provided that the issuer is established in the EEA. 21
MEASURES TAKEN BY THE EUROSYSTEM IN 2008 AND THE FAILURE OF LEHMAN BROTHERS 6.000% 5.000% 4.000% 3.000% 2.000% 1.000% 0.000% EURO: EONIA, Main Refinancing Operations rates and Standing Facilities rates: January 2007 - December 2008 EONIA Main Ref.Op. Deposit Facility Marginal Lending Facility 02 / Jan / 07 01 / Feb / 07 03 / Mar / 07 02 / Apr / 07 02 / May / 07 01 / Jun / 07 01 / Jul / 07 31 / Jul / 07 30 / Aug / 07 29 / Sep / 07 29 / Oct / 07 28 / Nov / 07 28 / Dec / 07 27 / Jan / 08 26 / Feb / 08 27 / Mar / 08 26 / Apr / 08 26 / May / 08 25 / Jun / 08 25 / Jul / 08 24 / Aug / 08 23 / Sep / 08 23 / Oct / 08 22 / Nov / 08 22 / Dec / 08 22
MEASURES TAKEN BY THE EUROSYSTEM IN 2008 AND THE FAILURE OF LEHMAN BROTHERS Spread between EURIBOR and EUREPO rates on 3 months maturity: January 2007 - December 2008 Spread Euribor 3 months Eurepo 3 month b.p. 6.000% 5.000% 4.000% 3.000% 2.000% 1.000% 200 180 160 140 120 100 80 60 40 20 0 02 / Jan / 07 01 / Feb / 07 03 / Mar / 07 02 / Apr / 07 02 / May / 07 01 / Jun / 07 01 / Jul / 07 31 / Jul / 07 30 / Aug / 07 29 / Sep / 07 29 / Oct / 07 28 / Nov / 07 28 / Dec / 07 27 / Jan / 08 26 / Feb / 08 27 / Mar / 08 26 / Apr / 08 26 / May / 08 25 / Jun / 08 25 / Jul / 08 24 / Aug / 08 23 / Sep / 08 23 / Oct / 08 22 / Nov / 08 22 / Dec / 08 23
MEASURES TAKEN BY THE EUROSYSTEM IN 2008 AND THE FAILURE OF LEHMAN BROTHERS millions of euro 1,200,000 1,000,000 800,000 Liquidity supply through Open Market Operations and Standing Facilities: January 2007- December 2008 Main Ref.Oper. Ref. Oper. 1 month LTRO 3 months LTRO 6 months LTRO 12 months Fine-tunning - injection of liquidity Fine-tunning - absorption of liquidity Marginal lending Facility Deposit Facility Net Balances 600,000 400,000 200,000 0-200,000-400,000 01 / Jan / 07 31 / Jan / 07 02 / Mar / 07 01 / Apr / 07 01 / May / 07 31 / May / 07 30 / Jun / 07 30 / Jul / 07 29 / Aug / 07 28 / Sep / 07 28 / Oct / 07 27 / Nov / 07 27 / Dec / 07 26 / Jan / 08 25 / Feb / 08 26 / Mar / 08 25 / Apr / 08 25 / May / 08 24 / Jun / 08 24 / Jul / 08 23 / Aug / 08 22 / Sep / 08 22 / Oct / 08 21 / Nov / 08 21 / Dec / 08 24
MEASURES TAKEN BY THE EUROSYSTEM IN 2009 The Governing Council has decided to decrease the rate of the main refinancing operations as well as the rates of the standing facilities(the marginal lending facility and the deposit facility) by four times (January, March, April and May) till 1%, 1.75% and 0.25%, respectively. Provision of liquidity through three longer-term refinancing operations with a maturity of one year and a tender procedure of fixed rate full allotment. Financing in US dollars and in Swiss francs. Purchase of euro-denominated covered bonds issued in the euro area. 25
MEASURES TAKEN BY THE EUROSYSTEM IN 2009 6.000% EURO: EONIA, Main Refinancing Operations rates and Standing Facilities rates: January 2007 - December 2009 EONIA Main Ref.Op. Deposit Facility Marginal Lending Facility 5.000% 4.000% 3.000% 2.000% 1.000% 0.000% 02 / Jan / 07 02 / Feb / 07 02 / Mar / 07 02 / Apr / 07 02 / May / 07 02 / Jun / 07 02 / Jul / 07 02 / Aug / 07 02 / Sep / 07 02 / Oct / 07 02 / Nov / 07 02 / Dec / 07 02 / Jan / 08 02 / Feb / 08 02 / Mar / 08 02 / Apr / 08 02 / May / 08 02 / Jun / 08 02 / Jul / 08 02 / Aug / 08 02 / Sep / 08 02 / Oct / 08 02 / Nov / 08 02 / Dec / 08 02 / Jan / 09 02 / Feb / 09 02 / Mar / 09 02 / Apr / 09 02 / May / 09 02 / Jun / 09 02 / Jul / 09 02 / Aug / 09 02 / Sep / 09 02 / Oct / 09 02 / Nov / 09 02 / Dec / 09 26
MEASURES TAKEN BY THE EUROSYSTEM IN 2009 Spread between EURIBOR and EUREPO rates on 3 months maturity: January 2007 - December 2009 Spread Euribor 3 months Eurepo 3 month b.p. 6.000% 5.000% 4.000% 3.000% 2.000% 1.000% 0.000% 200 180 160 140 120 100 80 60 40 20 0 02 / Jan / 07 16 / Feb / 07 02 / Apr / 07 17 / May / 07 01 / Jul / 07 15 / Aug / 07 29 / Sep / 07 13 / Nov / 07 28 / Dec / 07 11 / Feb / 08 27 / Mar / 08 11 / May / 08 25 / Jun / 08 09 / Aug / 08 23 / Sep / 08 07 / Nov / 08 22 / Dec / 08 05 / Feb / 09 22 / Mar / 09 06 / May / 09 20 / Jun / 09 04 / Aug / 09 18 / Sep / 09 02 / Nov / 09 17 / Dec / 09 27
MEASURES TAKEN BY THE EUROSYSTEM IN 2009 millions of euro 1,200,000 1,000,000 800,000 Liquidity supply through Open Market Operations and Standing Facilities: January 2007- December 2009 Main Ref.Oper. LTRO 3 months LTRO 12 months Fine-tunning - absorption of liquidity Deposit Facility Ref. Oper. 1 month LTRO 6 months Fine-tunning - injection of liquidity Marginal lending Facility Net Balances 600,000 400,000 200,000 0-200,000-400,000 01 / Jan / 07 02 / Mar / 07 01 / May / 07 30 / Jun / 07 29 / Aug / 07 28 / Oct / 07 27 / Dec / 07 25 / Feb / 08 25 / Apr / 08 24 / Jun / 08 23 / Aug / 08 22 / Oct / 08 21 / Dec / 08 19 / Feb / 09 20 / Apr / 09 19 / Jun / 09 18 / Aug / 09 17 / Oct / 09 16 / Dec / 09 28
MEASURES TAKEN BY THE EUROSYSTEM IN 2009 Basis points Covered Bonds - Benchmark spread 500 450 400 350 300 250 200 France Germany Irland Italy Portugal Spain 150 100 50 0 Source: Markit 29
THE BALANCE SHEET OF THE EUROSYSTEM millions of euro Balance Sheet of the Eurosystem Covered Bonds 3,000,000 Assets Other Assets 2,000,000 Financial Assets 1,000,000 TAF & FX Swaps (USD &CHF) 0-1,000,000 Monetary Policy Operations Other Liabilities General government -2,000,000-3,000,000 Liabilities TAF & FX Swaps (USD &CHF) Monetary Policy Operations 01 / Jan / 07 01 / Mar / 07 01 / May / 07 01 / Jul / 07 01 / Sep / 07 01 / Nov / 07 01 / Jan / 08 01 / Mar / 08 01 / May / 08 01 / Jul / 08 01 / Sep / 08 01 / Nov / 08 01 / Jan / 09 01 / Mar / 09 01 / May / 09 01 / Jul / 09 01 / Sep / 09 01 / Nov / 09 Current accounts (covering the minimum reserve system) Banknotes in circulation 30
THE BALANCE SHEET OF THE FED mm$ 3,000 Balance Sheet of the FED (2007-2009) 3000 CP Funding Facility 2,000 Assets 2000 Term auction and other loans Repo's 1,000 0 1000 0 Securities held outright Other Assets -1,000-1000 Other Liabilities -2,000 Liabilities -2000 Deposits others than Reserve Balances -3,000-3000 Reserves balances 01 / Jan / 07 01 / Apr / 07 01 / Jul / 07 01 / Oct / 07 01 / Jan / 08 01 / Apr / 08 01 / Jul / 08 01 / Oct / 08 01 / Jan / 09 01 / Apr / 09 01 / Jul / 09 01 / Oct / 09 Currency in circulation Source: Federal Reserve Release H4.1 31
SYNTHESES OF THE MEASURES TAKEN BY THE EUROSYSTEM Decrease of the interest rates to levels close to zero. Increase of the average maturity of open market operations through the introduction of new types of refinancing operations (one, six and twelve months) and through the reduction of the liquidity provided through the weekly maturity. Amendment of the tender procedures for fixed rate full allotment in all open market operations, creating a very huge excess of liquidity Purchase of euro-denominated covered bonds issued in the euro area. 32
MAIN GOALS OF THE MEASURES TAKEN BY THE EUROSYSTEM Reduction of the interest rates volatility in particular for the money market but also for the financial markets in general, helping the development of economic activity. Replacement of the money market counterparties, taking the credit risk of the refinancing operations of the banking system and helping the treasury management of the credit institutions. Support to the refinancing of the credit institutions and to the development of the covered bond market. 33
Many thanks 34