The Eurosystem's instruments
The operational framework of the Eurosystem consists of the following set of instruments:
- open market operations,
- standing facilities,
- minimum reserve requirements for credit institutions.
In addition, since 2009 the ECB has implemented several non-standard monetary policy measures, i.e. asset purchase programmes, to complement the regular operations of the Eurosystem.
All these instruments are based on the Legal framework for monetary policy instruments.
The monetary policy framework strives to ensure the participation of a broad range of counterparties. Only institutions subject to minimum reserves may have access to the standing facilities and participate in open market operations based on standard tenders. For outright transactions, no restrictions are placed a priori on the range of counterparties.
Open market operations play an important role in steering interest rates, managing the liquidity situation in the market and signalling the monetary policy stance.
Five types of financial instrument are available to the Eurosystem for its open market operations. The most important instrument is the reverse transaction, which may be conducted in the form of a repurchase agreement or as a collateralised loan. The Eurosystem may also make use of outright transactions, issuance of debt certificates, foreign exchange swaps and collection of fixed-term deposits.
Open market operations are initiated by the ECB, which decides on the instrument and the terms and conditions. It is possible to execute open market operations on the basis of standard tenders, quick tenders or bilateral procedures.
Four types of open market operation
Open market operations can differ in terms of aim, regularity and procedure.
- Main refinancing operations are regular liquidity-providing reverse transactions conducted by the Eurosystem with a frequency and maturity of normally one week. They are executed in a decentralised manner by the national central banks on the basis of standard tenders and according to an indicative calendar published on the ECB’s website. The main refinancing operations play a pivotal role in fulfilling the aims of the Eurosystem's open market operations and normally provide the bulk of refinancing to the financial sector.
- Longer-term refinancing operations are liquidity-providing reverse transactions with a longer maturity than the main refinancing operations. Regular longer-term refinancing operations have a maturity of three months and are conducted each month by the Eurosystem on the basis of standard tenders in accordance with the indicative calendar on the ECB’s website. The Eurosystem may also conduct non-regular longer-term operations, with a maturity of more than three months. Such operations, with maturities of up to 48 months (the longest being the targeted longer-term refinancing operations, or TLTROs), are not included in the indicative calendar. Longer-term refinancing operations are aimed at providing counterparties with additional longer-term refinancing and can also serve other monetary policy objectives.
- Fine-tuning operations can be executed on an ad hoc basis to manage the liquidity situation in the market and to steer interest rates. In particular, they are aimed at smoothing the effects on interest rates caused by unexpected liquidity fluctuations. Fine-tuning operations are primarily executed as reverse transactions, but may also take the form of foreign exchange swaps or the collection of fixed-term deposits. The instruments and procedures applied in the conduct of fine-tuning operations are adapted to the types of transaction and the specific objectives pursued in performing the operations. Fine-tuning operations are normally executed by the Eurosystem through quick tenders or bilateral procedures. The Eurosystem may select a limited number of counterparties to participate in fine-tuning operations.
- Structural operations can be carried out by the Eurosystem through reverse transactions, outright transactions, and the issuance of debt certificates. These operations are executed whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector (on a regular or non-regular basis). Structural operations in the form of reverse transactions and the issuance of debt instruments are carried out by the Eurosystem through standard tenders. Structural operations in the form of outright transactions are normally executed through bilateral procedures.
Standing facilities aim to provide and absorb overnight liquidity, signal the general monetary policy stance and bound overnight market interest rates. Two standing facilities, which are administered in a decentralised manner by the NCBs, are available to eligible counterparties on their own initiative.
Marginal lending facility
Counterparties can use the marginal lending facility to obtain overnight liquidity from the NCBs against eligible assets. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.
Counterparties can use the deposit facility to make overnight deposits with the NCBs. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.
Minimum reserves are an integral part of the operational framework for the monetary policy in the euro area.
The intent of the minimum reserve system is to pursue the aims of stabilising money market interest rates and creating (or enlarging) a structural liquidity shortage.
The reserve requirement of each institution is determined in relation to elements of its balance sheet. In order to pursue the aim of stabilising interest rates, the Eurosystem's minimum reserve system enables institutions to make use of averaging provisions. This implies that compliance with the reserve requirement is determined on the basis of the institutions' average daily reserve holdings over a maintenance period of about one month. The reserve maintenance periods start on the settlement day of the main refinancing operation (MRO) following the Governing Council meeting at which the monthly assessment of the monetary policy stance is pre-scheduled. The required reserve holdings are remunerated at a level corresponding to the average interest rate over the maintenance period of the main refinancing operations of the Eurosystem.
The expanded asset purchase programme (APP) adds the asset purchase programme for public sector securities to the existing private sector asset purchase programmes to address the risks of a too prolonged period of low inflation. It consists of the:
- third covered bond purchase programme (CBPP3)
- asset-backed securities purchase programme (ABSPP)
- public sector purchase programme (PSPP)
- corporate sector purchase programme (CSPP)
Overview on Eurosystem open market operations and standing facilities
|Monetary policy operations||Types of transactions||Maturity||Frequency||Procedure|
|Open market operations|
|Main refinancing operations||Reverse transactions||-||One week||Weekly||Standard tenders|
|Longer-term refinancing operations2||Reverse transactions||-||Three months||Monthly||Standard tenders|
|Fine-tuning operations||Reverse transactions||Reverse transactions||Non-
|Foreign exchange swaps||Collection of fixed-term deposits||Bilateral Procedures|
|Foreign exchange swaps|
|Structural operations||Reverse transactions||Issuance of debt certificates||Standardised/ non-standardised||Regular and non-regular||Standard tenders|
|Marginal lending facility||Reverse transactions||-||Overnight||Access at the discretion of counterparties|
|Deposit facility||-||Deposits||Overnight||Access at the discretion of counterparties|
|2This procedure also applies to irregular longer-term refinancing operations with longer maturities.|