Eurosystem

Eurosystem[€]

Institutional framework

The primary objective of the Eurosystem is to maintain price stability. The Eurosystem, which consists of the ECB and the National Central Banks (NCBs) of the countries which have adopted the euro, defines and implements monetary policy for the euro area according to this objective. In 2003, the Governing Council of the ECB clarified that, in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2% over the medium term.

To implement the decisions made by the Governing Council of the ECB on monetary policy in the euro area, the Eurosystem uses a range of instruments and procedures under its monetary policy implementation framework through which it steers very short term market rates close to its policy rates, the former being considered as the operational target of the monetary policy (as opposed to the ultimate target of price stability).

Key features of the monetary policy implementation framework

Under its operational framework, the Eurosystem conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves on accounts with the NCBs. The operations are executed under uniform terms and conditions in all Member States whose currency is the euro. The actual implementation of the single monetary policy is made in a decentralised manner and conducted by the euro area NCBs

The monetary policy framework allows for the participation of a broad range of counterparties under uniform eligibility criteria specified by the Eurosystem to ensure equal treatment across the euro area. Credit institutions are eligible as Eurosystem counterparties if they fulfil the following criteria. They must be: i) located in the euro area (subsidiary or branch) and subject to minimum reserve requirements; ii) subject to harmonised EU/EEA-supervision or comparable third country regime; iii) financially sound; and iv) fulfil the operational criteria. Eligible counterparties may access the Eurosystem's standing facilities and participate in Eurosystem open market operations which are based on standard tenders. Currently, there are around 2,050 eligible counterparties with access to standing facilities and about 1,800 with access to open market operations. As a rule, NCBs conduct the single monetary policy only with counterparties located or domiciled within their respective countries.

The Eurosystem uses open market operations for steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy, using either liquidity providing or absorbing operations. These operations can be divided into four categories: (a) main refinancing operations (MROs) which are usually weekly reverse repo transactions; (b) longer-term refinancing operations (LTROs) which are offered every month with a 3-month maturity to provide longer-term refinancing to the banking sector; (c) fine-tuning operations which may be used to fine-tune the amount of liquidity on the last day of the maintenance period but also to deal with liquidity fluctuations in the market; and (d) structural operations. Structural operations, by means of reverse transactions, the issuance of ECB debt certificates or outright transactions 1, may be carried out whenever the structural position of the Eurosystem needs to be adjusted with regard to the financial sector but have never been implemented.

The standing facilities consist of the marginal lending facility (MLF) and the deposit facility (DF). Eligible counterparties may use the MLF to obtain overnight liquidity from the Eurosystem through a reverse transaction with their home NCB at the rate for the MLF using eligible assets as collateral. There is no limit on the amount of liquidity that may be provided under the MLF, subject to eligible collateral availability. A negative balance on a counterparty's settlement account at the end of a business day is automatically considered as a request for recourse to the MLF. Counterparties may use the DF to make overnight deposits with the Eurosystem through the home NCB, to which the DF rate shall be applied. As in the case of the MLF, there is no limit on the amount a counterparty can deposit under the DF. The interest rates on the two facilities form an interest rate corridor for short-term money market rates among eligible counterparties and, together with the rate applied to MROs, signal the general stance of monetary policy.

The minimum reserve system pursues the aims of stabilising money market interest rates and potentially creating (or enlarging) a structural liquidity shortage. All credit institutions are subject to minimum reserve requirements (unless individual exemptions are provided on a case by case basis). The Eurosystem's minimum reserve system enables institutions to make use of averaging provisions, implying that compliance with reserve requirements is determined on the basis of the average of the end-of-calendar-day balances on the counterparties' reserve accounts over a maintenance period (around six to seven weeks). The reserve ratio, currently at 1%, is applied to banks' short-term liabilities (mainly deposits up to 2 years) and the remunerated reserves (at the MRO rate) are to be held on current accounts with the counterparties' home central bank.

Pursuant to Article 18.1 of the Statute of the ESCB, all Eurosystem credit operations (ie liquidity-providing monetary policy operations and intraday credit) are conducted against adequate collateral aimed at protecting the Eurosystem against financial losses in case of default of a counterparty. To ensure a smooth implementation of its monetary policy the Eurosystem accepts as collateral a wide range of marketable debt instruments and non-marketable assets. Eligible assets can be used across all credit operations as long as they fulfil transparent, uniform eligibility criteria specified by the Eurosystem. These are mainly based on the classification of the asset, credit quality, listing market, the type of issuer, country of residence or incorporation and the currency of denomination. There are currently around 25,000 marketable assets eligible as collateral, which are published in the list of eligible marketable assets (C2D/EA).

Every eligible collateral is subject to specific risk control measures (primarily haircuts) that are calibrated for different asset classes to ensure compliance with the risk tolerance defined by the Eurosystem in a neutral fashion.

Due to the inherent flexibility in the monetary policy implementation, the Governing Council of the ECB may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem operations.

Non-standard monetary policy measures

In response to the banking, financial and sovereign debt crisis, and the ensuing macroeconomic impact and risks for price stability, the ECB Governing Council has taken a series of non-standard monetary policy measures. As part of the non-standard measures, MROs and LTROs are currently being conducted as fixed rate tender procedures with full allotment (FRFA). The maturity of additional LTROs has been extended to up to 3 years, the minimum reserve requirements have been lowered, the collateral framework has (temporarily) been expanded, foreign currency liquidity has been offered and securities lending programmes were set up.

Moreover, since 2009, the Governing Council of the ECB has adopted several asset purchase programmes with the aim to support the functioning of the transmission mechanism. Additionally, since 2014, it has carried out large-scale outright purchases in the context of the Asset Purchase Programme (APP) 2, as well as targeted longer-term refinancing operations (TLTROs), with the aim of safeguarding price stability and further enhancing the transmission of monetary policy. With these tools the Eurosystem seeks to fulfil its mandate through intermediary objectives going beyond the steering of the short term money market. In the current environment of large excess liquidity very short term interest rates are anchored to the lower bound of the corridor. To support the bank-based transmission of monetary policy, while preserving the positive contribution of negative rates to the accommodative stance of monetary policy, the Eurosystem introduced a two-tier system for reserve remuneration, which exempts part of credit institutions' excess liquidity holdings (ie reserve holdings in excess of minimum reserve requirements) from negative remuneration.

Finally, the ECB has also provided forward guidance on the future path of the ECB's interest rate policy conditional on the outlook for price stability.

1

For outright transactions, no a priori restrictions are placed on the range of counterparties.

2

The APP consists of the third covered bond, the asset-backed securities, the public sector and the corporate sector purchase programmes. Via broad-based purchases and smooth and flexible implementation, the Eurosystem adheres to the principle of market neutrality. As regards the public sector purchase programmes, 80% of the asset purchases are not subject to risk-sharing.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Governing Council, which consists of the six members of the Executive Board, plus the governors of the national central banks of the 19 euro area countries.
Major mandates Maintain price stability
Decision-making process Majority
Frequency / length of meetings Every second week
Frequency of announcements Every six weeks
Main policy target Policy target: Price stability, defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below but close to 2%.
ECB sets three key interest rates:
i) the interest rate on the main refinancing operations (MRO);
ii) the rate on the deposit facility, and
iii) the rate on the marginal lending facility; combined with forward guidance and non-standard measures related to the Eurosystem’s balance sheet.

Overview of key features

Key policy rate Interest rate on MROs
maturity (days) 7
Operating target Short term interest rates (not explicit)
maturity (days)
Standing facilities Lending, deposit
Corridor width (bp) 65
Reserve requirements Yes
maintenance period Around 6/7 weeks
Main operation RP
functions
maturity (days)
regular interval
frequency
Overall frequency ≈1 x w
Discretion left to operational desk No discretion left to operational desks for standard monetary policy operations. Some discretion left to operational desks for the implementation of certain asset purchase operations within the set of non-standard monetary policy measures.
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance Yes.
Timing / media of policy announcement Release of monetary policy decisions at 13:45 ECB time on the day of Governing Council meeting on the ECB website.
Policy announcement and documents Decisions on key ECB interest rates and non-standard measures.
Explaining policy decisions Press conference starting at 14:30 ECB time on the day of Governing Council meeting.
Dissemination of minutes (timing / media) No dissemination of minutes, but accounts of the monetary policy meetings released four weeks after the meeting.
Content of minutes No dissemination of minutes, but the accounts summarise a review of financial, economic and monetary developments and policy options as well as the Governing Council’s discussion and monetary policy decisions.
Publication of forecasts Yes, quarterly publication of staff macroeconomic projections.
Publication of projected path of policy rate No

Reserve requirements: ratios and size

Main functions served Liquidity management
Domestic currency 1%
Foreign currency
Average 1%
Required reserves EUR 132 bn
Required reserve as % of GDP 1.1%
Actual reserves EUR 1,310 bn
Actual reserve as % of GDP 11.3%

Main features of reserve requirements

Averaging Y
Carry-over N
Type Lagged
Maintenance period Around 6/7 weeks
end (day) Tue
Calculation period Around 6/7 weeks
end (day) Tue
Lag before maintenance 32–62 days
Vault cash N
restrictions
Remuneration Y
average rate Interest rate on the main refinancing operation
marginal rate Interest rate on the main refinancing operation
Framework last changed 01/15

Liquidity position and forecasting

Structural Position Deficit
Most volatile factor(s) Government deposits
Most unpredictable factor(s) Government deposits
Forecast horizon(s) 10–49 working days
Frequency Daily
Frequency of revision Daily
Forecast published? Yes

Standing facilities: lending / market ceiling

Name Marginal lending facility
Form Reversed purchase (RP) or collateralised credit
Pricing method Fixed rate
Maturity 1 day O/N
Access limited by/to Collateral
Function(s) Signalling; limit interest rate volatility

Standing facilities: deposit / market floor

Name Deposit facility
Form Deposit
Pricing method Fixed rate
Maturity 1 day O/N
Access limited by/to No limit
Function(s) Signalling; Limit interest rate volatility

Open market operations: repo or reverse repo

Name/Type (i) RP or collateralised credit
(ii) RP–Quick tenders
Maturity (i) 1 week and 3 months
(ii) Varies
Frequency (i) Weekly for 1-week operations; monthly for 3-month operations
(ii) As needed
Pricing method (i) Fixed rate
(ii) Varies, no quick tenders are conducted currently
Access limited by/to Monetary financial institutions fulfilling eligibility criteria
Function(s) Basic refinancing (increased emphasis on intermediation)
Fine tuning

Open market operations: central bank bills

Name N/A currently
Total issuance N/A currently
Maturity N/A currently
Restrictions on possible maturities N/A currently
Pricing method N/A currently
Access limited by/to N/A currently
Discretion left to operational desk N/A currently

Open market operations: FX swaps

Maturity N/A currently
Frequency N/A currently
Pricing method N/A currently
Access limited by/to N/A currently
Function(s) N/A currently

Other significant liquidity management means

Name/Type (i) Targeted Longer-term Refinancing Operations (TLTROs)
(ii) Targeted-Longer-term Refinancing Operations (TLTROs-II)
(iii) Targeted-Longer-term Refinancing Operations (TLTROs-III)
(iv) Asset Purchase Programme (APP), including:
(a) OT purchases of bonds issued by euro area central and regional governments, agencies and European institutions (PSPP)
(b) OT purchases of ABS (ABSPP)
(c) OT purchases of covered bonds (CBPP3)
(d) OT purchases of corporate bonds (CSPP)
Form
Frequency (i) 8 operations, last one conducted in June 2016
(ii) 4 operations, last one to be conducted in March 2017
(iii) 7 operations, to be conducted between September 2019 and March 2021
(iv) Daily
Maturity (i) 48 months maximum
(ii) 48 months
(iii) 36 months
(iv) (a) 1–30 years
(b) not specified
(c) not specified
(d) 0.5–30 years
Pricing Method (i) MRO + 10 bps for first 2 TLTROs / MRO flat for subsequent 6 TLTROs.
(ii) Between MRO and DF rates depending on lending behaviour
(iii) Between MRO and DF rates depending on lending behaviour
(iv) (a) buying alongside market
(b) buying alongside market
(c) buying alongside market
(d) buying alongside market
Access limited by/to (i) ECB eligible monetary policy counterparties that have submitted required statistical data to calculate allowances
(ii) ECB eligible monetary policy counterparties that have submitted required statistical data to calculate allowances
(iii) ECB eligible monetary policy counterparties that have submitted required statistical data to calculate allowances
(iv) ECB eligible monetary policy counterparties and Eurosystem investment counterparties
Function(s) (i) Improving bank lending to the euro area non-financial private sector, excluding household loans for house purchase
(ii) Improving bank lending to the euro area non-financial private sector, excluding household loans for house purchase
(iii) Preserving favourable bank lending conditions and stimulate bank lending to the real economy
(iv) (a) monetary policy accommodation
(b and c) monetary policy accommodation and enhancement of monetary transmission mechanism by supporting market segments that play key role in credit provision to broad economy
(d) monetary policy accommodation and further strengthening of the pass-through of the Eurosystem’s asset purchases to the financing conditions of the real economy

Settlement systems and intra-day liquidity facilities

Settlement system RTGS, since 1999
Intra-day liquidity facility Intra-day repo and overdraft, depending on country
Charge No charge if against collateral
Foreign currency settlement system No
CLS participation by banks Yes
Other settlement system(s) Ancillary systems

Collateral

Standing facilities: List of eligible collateral No distinction is made between collateral eligible for Marginal Lending Facility / Open Market Operations /Intraday credit.
Two categories:
1. Marketable assets, representing around
14 trillion euros (not all available on the banks’ balance sheets). Full list available on ECB Website (-> Collateral).
2. Non marketable assets. By contrast with marketable assets, the amount of non-marketable assets which are eligible as collateral only becomes known to the Eurosystem upon submission, ie once effectively used as collateral. Eligibility tables for both categories available on the ECB’s Website (Home -> Monetary Policy -> Collateral -> Eligibility criteria and assessment). Amounts eligible and used as collateral are also published on the ECB’s Website.
Standing facilities: Discretion of central bank on collateral The Governing Council has the possibility to expand the list of eligible assets; only limited by Article 18.1 of the Statute of the ESCB, which defines that all Eurosystem credit operations need to be based on adequate collateral; concept of “adequate” has two dimensions, ie Eurosystem protection from incurring losses and availability of sufficient collateral to a broad set of counterparties; eligibility criteria are laid down in the “General framework; additional temporary measures on collateral eligibility are laid down in “Temporary framework”;
Euro area credit institutions can receive central bank credit not only through monetary policy operations, but exceptionally also through emergency liquidity assistance (ELA), which can be collateralised by assets other than the assets which are eligible for monetary policy credit operations. ELA means the provision by a Eurosystem NCB of 1) central bank money and/or 2) any other assistance that may lead to an increase in central bank money to a solvent financial institution, or group of solvent financial institutions, that is facing temporary liquidity problems, without such operation being part of the single monetary policy.
Open market operations: List of eligible collateral (See entry for standing facilities)
Open market operations: Discretion of central bank on collateral (See entry for standing facilities)

Dissemination of operational information: liquidity forecast

Forecast published? Yes
Channel(s) ECB website, Market Information Dissemination (MID)
Timing Together with announcement and allotment of weekly main refinancing operations and (possibly) fine-tuning operations
Remarks Forecasts for daily averages during the length of the main refinancing operation and not daily values are published

Dissemination of operational information: open market operations

Volume and price published? Yes – Main Refinancing Operations, Longer-Term Refinancing Operations, Targeted Longer-Term Refinancing Operations
Channel(s) ECB website, Market Information Dissemination (MID)
Timing When allotment results are published (eg 11:30 ECB time for main refinancing operations)
Aggregated amount of all outstanding operations: Daily between 09:10 and 09:15
ECB Statistical Bulletin

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) ECB website, Market Information Dissemination (MID)
Lending facility usage: Timing Daily between 09:10 and 09:15 ECB time
Deposit facility usage: Channel(s) ECB website, Market Information Dissemination (MID)
Deposit facility usage: Timing Daily between 09:10 and 09:15 ECB time

Other information dissemination

Type (i) FX intervention
(ii) Asset Purchase Programme outstanding book values
(iii) Outstanding book value of the Public Sector Purchase Programme (PSPP) per country of issuance of the assets purchased and weighted average of the remaining maturity of the holdings.
(iv) Weekly list of ISINs of PSPP securities available for lending under the securities lending programme.
(v) Split of Covered Bond Purchase Programme holdings between primary and secondary market purchases.
(vi) List of eligible marketable assets
(vii) Amounts of assets that are eligible and used as collateral by asset category
Channel(s) (i) Press release, possibly; weekly financial statements
(ii) ECB website, Market Information Dissemination (MID)
(iii-vii) ECB website
Timing (i) After intervention has taken place
(ii) Weekly at the time of the MRO announcement
(iii) Monthly
(iv) Weekly
(v) Monthly
(vi) Daily
(vii) Quarterly publication of monthly data