Eurosystem
Eurosystem[EUR]
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 2021, the Governing Council of the ECB agreed to aim for a symmetric inflation target of 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 rate, the former being considered as the operational target of the monetary policy.
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 all euro area credit institutions as defined in the Capital Requirements Regulation (CRR) under uniform eligibility criteria specified by the Eurosystem to ensure equal treatment across the euro area. Credit institutions are eligible as Eurosystem monetary policy 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 tender procedures. 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.
Standard open market operations can be divided into four categories: (a) main refinancing operations (MROs) which are usually weekly reverse repo transactions; (b) standard 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 can be executed on an ad hoc basis to deal with liquidity fluctuations in the market and to steer interest rates; and (d) structural operations. Structural operations, by means of outright transactions 1, reverse transactions or the issuance of ECB debt certificates, may be carried out whenever the structural position of the Eurosystem needs to be adjusted with regard to the financial sector. MROs and 3-month LTROs are currently being conducted as fixed rate tender procedures with full allotment (FRFA) and will continue to be conducted as FRFA for as long as necessary.
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 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 an eligible 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. 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 interbank 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. The excess reserves are remunerated at the lowest between the deposit facility rate (DFR) and 0%. The ECB might exempt, via the two-tier system for remunerating excess reserve holdings, part of the excess reserves held in reserve accounts with the Eurosystem from the DFR remuneration.
Pursuant to Article 18.1 of the Statute of the ESCB, all Eurosystem credit operations (i.e. liquidity-providing monetary policy operations and intraday credit) are conducted against adequate eligible 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 and published by the Eurosystem. These are mainly based on the asset type, credit quality, listing market, the type of issuer, country of residence or incorporation or the currency of denomination. There are currently around 25,000 marketable assets eligible as collateral, which are published on a daily basis on the list of eligible marketable assets (Eligible Assets Database).
Every eligible collateral is subject to rules for the use of collateral (e.g. prohibiting close links between the collateral and the counterparty using it), specific valuation and 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 fashion neutral across issuer types and asset classes.
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. These measures included the conduct of several rounds of longer-term refinancing operations with a maturity longer than three months, the conduct of three series of targeted longer-term refinancing operations (TLTROs) offering banks long-term funding at attractive rates, conditional upon the achievement of predefined lending targets, as well as several asset purchase programmes 2. As part of these measures, the collateral framework has also been (temporarily) expanded, foreign currency liquidity has been offered, and securities lending programmes were set up.
Moreover, since 2020, and to counter serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak, the ECB Governing Council has introduced additional outright purchases of securities under the Pandemic emergency purchase programme (PEPP) and unconditional reverse liquidity-providing transactions under the Pandemic emergency longer-term refinancing operations (PELTROs). In addition, it has eased the conditions of the third TLTRO series, complemented also by a package of further collateral easing measures.
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 and steered by the DFR. 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 excess reserve remuneration, which exempts part of credit institutions' excess liquidity holdings (i.e. 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. 1 |
|---|---|
| Major mandates 2 | Maintain price stability |
| Decision-making process | Majority |
| Frequency / length of meetings | Usually twice a month |
| 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 2% (symmetric target) over the medium term. ECB sets three key interest rates: i) the interest rate on the main refinancing operations (MRO); ii) the interet rate on the deposit facility (DFR), and iii) the interest rate on the marginal lending facility (MLF); |
Overview of key features
| Key policy rate | In the current environemment of high excess liquidity, the short term market interest rates are effectively steered by DFR. |
|---|---|
| maturity (days) | o/n |
| Operating target | Short term interest rates (not explicit) |
| maturity (days) | |
| Standing facilities | Lending, deposit |
| Corridor width (bp) | 75 3 |
| Reserve requirements | Yes |
| maintenance period | Around 6/7 weeks |
| Main operation 4 | RP. The standard monetarty policy operations are MROs and 3m LTROs. 5 |
| functions | |
| maturity (days) | 7 for the MRO and 3m for the LTRO |
| regular interval | Yes |
| frequency | 1 x w for the MRO / 1 x quarter for LTRO |
| Overall frequency | ≈1 x w |
| Discretion left to operational desk | No discretion left to operational desks for standard monetary policy operations, assuming all counterparty and collateral eligiblity criteria are fulfilled. 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 | √ (APP purchase pace, full allotment horizon) |
Monetary policy communication
| Explicit use of forward guidance | Yes until July 2022. |
|---|---|
| Timing / media of policy announcement | Release of monetary policy decisions at 14:15 ECB time on the day of the monetary policy Governing Council meeting on the ECB website. |
| Policy announcement and documents | Decisions on three key ECB interest rates and non-standard measures |
| Explaining policy decisions | Press conference starting at 14:45 ECB time on the day of monetary policy 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 6 | Yes, quarterly publication of staff macroeconomic projections. |
| Publication of projected path of policy rate 7 | No |
Reserve requirements: ratios and size
| Main functions served | Liquidity management |
|---|---|
| Domestic currency | 1% |
| Foreign currency | – |
| Average | 1% |
| Required reserves | EUR 160 858 bn 8 |
| Required reserve as % of GDP | 1.4% |
| Actual reserves | EUR 3,782,461 bn 9 |
| Actual reserve as % of GDP | 32.5% |
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 | |
| Framework last changed | 01/15 |
Liquidity position and forecasting
| Structural Position | Surplus |
|---|---|
| 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 10 |
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 / eligible counterparties |
| 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 size limit / eligible counterparties |
| Function(s) | Signalling; Limit interest rate volatility |
Open market operations: repo or reverse repo
| Name/Type 11 | (i) RP or collateralised credit (ii) RP–Quick tenders 12 |
|---|---|
| Maturity | (i) 1 week and 3 months (ii) Varies |
| Frequency | (i) Weekly for 1-week operations; monthly for 3-month operations (ii) As needed 13 |
| Pricing method | (i) Fixed rate (ii) Varies, no quick tenders are conducted currently |
| Access limited by/to | eligible counterparties (i.e. Monetary financial institutions (MFIs) 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 14 | (i) Targeted Longer-term Refinancing Operations (TLTROs) (ii) Targeted-Longer-term Refinancing Operations (TLTROs-II) (iii) Targeted-Longer-term Refinancing Operations (TLTROs-III) (iv) Pandemic emergency longer-term refinancing operations (PELTROs) (v) 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) (vi) Pandemic Emergency Purchase Programme (PEPP) (vii) Transmission Protection Instrument (TPI) |
|---|---|
| Form | |
| Frequency | (i) 8 operations, last one conducted in June 2016 (ii) 4 operations, last one conducted in March 2017 (iii) 10 operations, conducted between September 2019 and December 2021 (iv) 11 operations, conducted between May 2020 and December 2021 (v) and (vi) Daily (vii) N/A |
| Maturity | (i) 48 months maximum (ii) 48 months (iii) 36 months (iv) 8-16 months (v) and (vi) a) 1–30 years (b) not specified (c) not specified (d) 8 days –30 years (iv) for public sector purchases, 70 days – 30y and 364 days ; (vii) N/A |
| Pricing Method | (i) MRO + 10 bps for first 2 TLTROs / MRO flat for subsequent 6 TLTROs. (ii) Between average MRO and DF rates depending on lending behaviour (iii) Between average MRO and 50 bps below the average DF rate depending on lending behaviour (iv) 25 basis points below the average MRO rate (v) and (vi) (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 (v) and (vi) 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 liquidity backstop facility, and contribute preserving the smooth functioning of money markets during the extended pandemic period. (v) and (vi) (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 (vii) as the Governing Council continues normalising monetary policy, the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries. |
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 15 |
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 18.2 trillion (Q2 2022 data, nominal amounts, not all eligible assets are available on the banks’ balance sheets). Full list available on ECB Website (-> Collateral). 2. Non marketable assets. By contrast with marketable assets, only amount of eligible non-marketable assets, that are mobilised known to the Eurosystem (Q2 2022: EUR 896 billion, after valuation and haircuts, averages of end of month data); Eligibility criteria and quantitative information on eligible (marketable) collateral and mobilised collateral (marketable and non-marketable) are available on the ECB’s Website (Home -> Monetary Policy -> Collateral -> Eligibility criteria and assessment) collateral data |
|---|---|
| Standing facilities: Discretion of central bank on collateral 16 | 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 the “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 17 | (See entry for standing facilities) |
Dissemination of operational information: liquidity forecast
| Forecast published? | Yes |
|---|---|
| Channel(s) | ECB website, Market Information Dissemination (MID) |
| Timing | Monday, between 11:25 and 11:30 ECB time |
| 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), wire services (Bloomberg, Refinitiv) |
| Timing | When allotment results are published (eg 11:30 ECB time for main refinancing operations) Aggregated amount of all outstanding operations: Daily between 11:25 and 11:30 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 11:25 and 11:30 ECB time |
| Deposit facility usage: Channel(s) | ECB website, Market Information Dissemination (MID) |
| Deposit facility usage: Timing | Daily between 11:25 and 11:30 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 |
1 Describe as well the legal status of the mandate and involvement of government
2 Describe as well the legal status of the mandate and involvement of government
3 As of 18 September 2019
4 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).
5 At the moment, most of liquidity is provided via non-standard monetary policy measures (i.e. asset purchases and targeted longer-term refinancing operations).
6 For instance, economic and inflation forecasts related to policy decision.
7 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.
8 As of July 2022
9 As of July 2022
10 weekly
11 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).
12 RP or collateralised credit: Standard variable rate tenders.
13 As needed: Normally at the end of the maintenance period.
14 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.
15 Ancillary systems are those systems in which payments or securities are exchanged and/or cleared while the ensuing monetary obligations are settled in TARGET.
16 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.
17 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.