The year at a glance
** Please note that these remarks relate to the ECB’s activities in 2019 and were finalised before the global coronavirus (COVID-19) pandemic. The economic situation and the ECB’s policy actions have evolved substantially since that point. The ECB will do everything necessary within its mandate to help the euro area through this crisis. **
2019 marked the 20th anniversary of the introduction of the euro, and support for the single currency among euro area citizens reached an all-time high of 76% in the November Eurobarometer poll.
Euro area economic growth moderated further in 2019, to 1.2% from 1.9% in the previous year. The continued expansion was supported by favourable financing conditions, further employment gains and the mildly expansionary fiscal stance, although global trade-related uncertainty weighed most notably on manufacturing and investment.
Euro area labour markets continued to improve in 2019. The unemployment rate declined further to 7.6%, and wage growth remained robust, around its long-run average.
Headline inflation in the euro area stood at 1.2% on average in 2019, down from 1.8% in 2018. This decline reflected lower contributions from the two more volatile components, energy and food. Excluding these two components, inflation averaged 1.0% in 2019, the same as in the two previous years.
Against that background, the ECB’s Governing Council undertook further monetary accommodation in 2019 over three successive rounds. This included a new series of targeted longer-term refinancing operations, an extension of our forward guidance, a reduction in our deposit facility rate and the resumption of our asset purchase programme. By the end of 2019 there were some initial signs of a stabilisation of growth dynamics and a mild increase in underlying inflation.
As part of our policy assessment process, the Governing Council takes into consideration the impact of any potential side effects of our policy. In that vein, a two-tier system for reserve remuneration was introduced, which exempts a fraction of banks’ excess cash reserves from the negative deposit facility rate, in order to safeguard the bank-based transmission of monetary policy.
Structurally low profitability remains a challenge for euro area banks, although the sector is adequately capitalised, with a 14.2% Common Equity Tier 1 ratio. During 2019 strong risk-taking in financial and real estate markets continued to fuel the build-up of asset price vulnerabilities, while risks continued to increase in the growing non-bank financial sector. Euro area countries, in consultation with the ECB, implemented a number of macroprudential measures to mitigate and build up resilience to systemic risks.
The Eurosystem continued its efforts to ensure the smooth operation of payment systems. This included preparations for the replacement of TARGET2 with a new, state-of-the-art real-time gross settlement system and the adoption of a new retail payments strategy. The strategy supports the development of a market-led pan-European solution for point-of-interaction payments, to complement the successful Single European Payments Area.
Publication of a new overnight reference rate, the €STR (euro short-term rate), began on 2 October, with the aim of replacing the current reference rate, EONIA, by January 2022. The daily production of the €STR has worked well and the methodology has proved reliable.
The ECB continues to study carefully the impact of climate change on the outlook for price stability and the financial system. This includes understanding the carbon intensity of bank lending portfolios and developing an analytical framework for carrying out a pilot climate risk stress-test analysis for the euro area banking sector. The ECB contributes to the efforts against climate change through its own investment decisions and environmental activities. We reduced carbon emissions and energy consumption per workplace by 74% and 54% respectively between 2008 and 2018.
2019 brought a renewed focus on engaging with a broader audience than financial markets and experts, and on listening more attentively to people’s concerns. Initiatives included the #EUROat20 competition, a new “ECB explains” video series and a monthly podcast.
Frankfurt am Main, May 2020
The year in figures
1 Euro area economic activity moderated amid muted inflationary pressures
After peaking in mid-2018, the global economy slowed down considerably in 2019 amid a sharp rise in trade-related uncertainty. The slowdown was broad-based and synchronised across countries. In this context, euro area economic growth moderated further, to 1.2% from 1.9% in the previous year. The growth moderation in 2019 was primarily driven by weaker international trade, in an environment of prolonged global uncertainty. At the same time, the slowdown was cushioned by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the continued – albeit slower – growth in global activity. Euro area labour markets improved further, while productivity growth decelerated substantially. Inflationary pressures remained muted overall. Headline inflation declined to 1.2%, driven by lower energy and food inflation, while underlying inflation remained subdued. Favourable financing conditions continued to support credit and money growth. Euro area government bond yields declined significantly, whereas euro area equity prices increased mainly on account of lower discount rates. Household wealth was supported by increased valuations of real and financial assets.
1.1 The global economy slowed down considerably
The global economy slowed down considerably in 2019 and the slowdown was broad-based and synchronised across countries
Over the course of 2019 global economic growth declined sharply. After peaking in mid-2018, the global economy slowed down considerably and grew at a rate that was well below the historical average and the weakest since the global financial crisis (see Chart 1). This global slowdown was broad-based and synchronised across countries. In large advanced economies such as the United States, the United Kingdom and Japan, this reflected a decrease from above average rates of growth. In China, growth declined to the lowest rate since 1990 and was around its currently estimated potential rate. Across other large emerging market economies, growth was generally lacklustre, partly reflecting a slow recovery from recent recessions.
Global GDP growth
The global economic slowdown was driven by a decline in manufacturing sector output and considerably weaker trade and investment growth. By contrast, services sector output growth moderated to a lesser extent, supported by relatively robust consumption growth and a continued improvement in labour markets.
Trade and investment growth weakened considerably in 2019, driven by a sharp rise in trade-related uncertainty
Trade-related uncertainty rose sharply and remained elevated, weakening the global economy. Trade tensions between the United States and China escalated, as suggested by a range of different indicators. Both countries raised tariffs on their bilateral trade. By the end of 2019 most US-China bilateral trade had been subject to higher tariffs. Trade uncertainty eased somewhat as a “phase one” trade agreement was announced in December following additional negotiations between the two countries since mid-October. The agreement was signed on 15 January 2020. Amid elevated trade tensions, the increase in tariffs drove the sharp decline in trade, while increased uncertainty and deteriorating economic sentiment held back investment growth in 2019 (see Chart 2).
Global trade growth
Headline inflation fell, but core inflation remained broadly stable
Global inflation remained subdued in 2019, reflecting weak global growth momentum (see Chart 3). In the OECD area, headline annual consumer price inflation fell from around 3% in the second half of 2018 to 2.1% in December 2019 on account of falling energy prices and slowing food price inflation. However, underlying inflation (excluding energy and food) remained relatively steady at around 2% over the year.
OECD inflation rates
Oil prices fluctuated, driven by oil supply dynamics and expectations about global demand
Oil prices fluctuated over the year, reflecting oil supply dynamics in the first half of the year and expectations about global demand in the second half. The oil price fluctuated between USD 53 per barrel and USD 74 per barrel in 2019. In the first half of the year higher than expected cuts to production by OPEC+ (a group of major oil producers), as well as geopolitical tensions, supported an upward trend in oil prices. In the second half oil prices fell amid concerns about trade tensions and the possible impact on the global economy. The effects of the supply outage in Saudi Arabia following a drone attack on 14 September were short-lived as large inventories and the quick restoration of production capacity helped cushion the shock.
The euro depreciated against currencies of euro area trading partners
The euro depreciated by 1.6% in nominal effective terms over the course of 2019 (see Chart 4). In bilateral terms, this was driven by a depreciation of the euro against the US dollar and the Japanese yen. The euro-pound sterling exchange rate also declined, but exhibited significant volatility throughout 2019 mainly on account of changing Brexit developments.
The euro exchange rate
The risks to the outlook for global growth were on the downside
At the end of 2019 the outlook for global growth entailed a moderation of growth as the economic cycle matured in advanced economies and as China gradually transitioned to a lower growth path, while the recovery in other emerging market economies remained fragile. This outlook was uncertain and, on balance, the risks to global activity were on the downside. To the extent that the weakness in the manufacturing sector spread to the services sector, global activity could decelerate more quickly. In China, a sharper slowdown could have a larger effect on the global economy, while an escalation of the trade dispute would exacerbate the negative impact on global trade flows. In Europe, in particular, there was a risk that the United States might impose trade tariffs on some goods in several countries. In general, heightened geopolitical tensions could adversely affect global growth and trade. In addition, despite the United Kingdom’s orderly withdrawal from the European Union, there was uncertainty about the future EU-UK relationship and the outcome of the negotiations remained a downside risk. Moreover, a sharp repricing in global financial markets could dent risk appetite globally and affect real economic activity.
1.2 Euro area economic growth moderated, while labour markets continued to improve
Euro area annual real GDP growth moderated further in 2019, reaching 1.2%, following growth of 1.9% in the previous year (see Chart 5). In contrast to the growth slowdown that took place in 2018, which was driven by weaker growth in both external and domestic demand, the growth moderation in 2019 was primarily driven by a marked weakening in international trade, in an environment of prolonged global uncertainty. At the same time, the euro area expansion continued to be supported by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the continued – albeit slower – growth in global activity.
Euro area real GDP
Domestically oriented sectors showed more resilience in 2019
Output growth in 2019 was driven by the services and construction sectors, which showed continued resilience on the back of robust euro area domestic demand. Activity in the euro area industrial sector weakened further (see Chart 6). This reflected negative repercussions from the weakness in foreign demand. There were by contrast only limited signs that weaker external demand affected services in 2019.
Euro area real gross value added by economic activity
In 2019 domestic demand continued to contribute positively to euro area growth, amid favourable financing conditions and improving labour markets. Private consumption, alongside consumer sentiment, remained resilient in 2019 (see Box 1). Household spending was supported by rising employment and wages, which resulted in growing aggregate labour income. Following the gradual slowdown starting in 2018, business investment remained moderate in 2019. A much less dynamic external environment and heightened global uncertainty weighed on firms’ investment decisions. In spite of this and the modest developments in corporate profitability and declining capacity utilisation, business investment continued to contribute positively to economic growth, supported by favourable financing conditions. Growth in investment in intellectual property products, which tends to be volatile, was particularly strong. At the same time, there was a slowdown in housing investment after its strong and prolonged recovery of previous years, alongside a moderation of the momentum in euro area housing markets. This deceleration mainly reflected increasingly binding constraints on housing supply – especially in terms of labour shortages, regulatory bottlenecks and the debt-reduction process – which limited growth in the construction sector in the course of 2019.
Consumption and household sentiment remained resilient
In 2019 the services and retail sectors remained resilient overall as the euro area economy slowed, despite some moderation in growth in these sectors. Private consumption represents an important part of demand in the services and retail sectors. With this in mind, this box looks more closely at consumer confidence in the euro area, considering the reasons for the relative resilience of consumer spending.
Sentiment among consumers stabilised and held up better than in other sectors
The economic slowdown in 2019 predominantly reflected weaker international trade alongside elevated levels of global uncertainty, which in turn mostly weighed on the euro area industrial sector. Meanwhile, the services and retail sectors remained resilient, despite some moderation. This is evident in Chart A, which displays sentiment in various sectors of the euro area economy. The European Commission’s Economic Sentiment Indicator (ESI) is a weighted average of confidence in industry excluding construction (with a weight of 40%), services (30%), construction (5%), the retail sector (5%) and households (20%). As can be seen, the slowdown in the more domestically oriented sectors (i.e. construction, services, retail and households) has been much less pronounced than in industry.
Euro area confidence – sectoral breakdown
Private consumption remained resilient overall in 2019
Private consumption growth in 2019 was held up by continued growth in real disposable income, which in turn was supported by a resilient labour market. Labour income benefited both from continued increases in wages and further, although slowing, employment gains. In addition, direct taxes, social contributions and transfers are overall likely to have had a small positive impact on income growth, in contrast with 2018 when they still dampened income growth (see Chart B). However, the contribution from the operating surplus and property income, which tend to be closely linked to economic activity, turned slightly negative in 2019, having been positive since 2015.
Real private consumption and disposable income
Drivers of consumer confidence
The Commission’s Consumer Confidence Index is the result of averaging four sub-indices relating to perceptions of past financial and economic developments as well as expectations regarding future developments 12 months ahead (see Chart C). While one sub-index relates to the assessment of the overall economic situation in the country, the others deal with households’ financial situation. Looking at the developments in these sub-indices, it can be seen that households had a relatively more benign view of their personal situation, mainly reflecting the ongoing resilience of the labour market, which has largely shielded household income from the economic slowdown.
Private consumption and consumer confidence
Robust labour market developments, in conjunction with rising wages, combined with favourable financing conditions and households’ improving financial position, largely explain why euro area consumer confidence remained elevated in 2019, supporting private consumption. In the context of resilient domestic demand alongside weak foreign demand, the ECB continues to closely monitor incoming data in order to assess the risk of negative spillovers from the external sector to the domestic sector.
The external sector contributed negatively in net terms to euro area output in 2019. With the exception of exports to the United States, which expanded at a slower pace, the decline was broad-based, owing mainly to the bleak performance of exports of capital goods and cars. Intra-euro area trade declined as well, with the slump concentrated in trade in intermediate goods, reflecting the impairment of euro area production chains.
Euro area labour markets continued to improve, while productivity growth decelerated substantially
Euro area labour markets continued to improve in 2019
Euro area labour markets continued to improve in 2019 (see Chart 7). This improvement was a key element supporting economic activity in 2019.
According to an analysis based on synthetic labour market indicators, the level of labour market activity was close to its precrisis peak in the second quarter of 2019. In addition, labour market momentum remained above its long-term average, although it has recently moderated somewhat. The good labour market performance occurred against the background of continued increases in labour supply, which in part reflected the higher participation of older workers resulting from previous reforms that increased the statutory pension age.
Labour market indicators
Employment increased by 1.2% in 2019, which is a robust rate when comparing with GDP growth developments. The growth of labour productivity per person employed was 0.0% in 2019, following 0.4% in 2018. In spite of the increases in labour supply, the unemployment rate continued to decline and reached 7.6% in 2019, close to the rate observed in 2007. However, the dispersion of unemployment rates across euro area countries remained high.
The digital economy requires monitoring
Digitalisation is having an effect on variables which are relevant for monetary policy
According to the literature, digitalisation is having an impact on a number of key economic variables which are relevant for monetary policy. The empirical evidence on the effects of digitalisation suggests that they may be pushing up activity and productivity, while its overall effect on inflation is not clear yet. In 2019 the degree of digitalisation of the EU economies ranged from around 40 for the least digital to around 70 for the most digital economies, according to the European Commission’s Digital Economy and Society Index (DESI) (see Chart 8). While the EU economies scored broadly similarly in terms of connectivity, they displayed less homogeneity in terms of human capital, use of the internet, integration of digital technology and digital public services.
Digital Economy and Society Index for 2019
Structural policies should help to address key challenges
The implementation of policy recommendations remained lacklustre in 2019
The implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential, reduce structural unemployment and increase the resilience of the economy. This includes structural policies to improve the functioning of labour markets, increase competition in product and factor markets and enhance the business environment. Furthermore, structural policies are needed to help address the current and future challenges posed, for example, by population ageing, digitalisation and climate change. The country-specific recommendations (CSRs) provide policy recommendations tailored to an individual country on how to enhance economic growth and resilience. The CSRs are endorsed by Member States in the European Council. In February 2019 the European Commission concluded that 95% of the policy recommendations had either not been implemented or, at best, had been implemented to “some” extent.
A mildly expansionary fiscal stance provided some support to economic activity
The euro area general government deficit ratio increased slightly on account of a mildly expansionary fiscal stance
After having been broadly neutral for five years, the euro area fiscal stance turned expansionary, albeit mildly, in 2019 (see Chart 9). The loosening of the stance provided support to economic activity in the euro area. It reflected expansionary policy measures which were implemented in some large member countries, mostly cuts to direct taxes as well as public expenditure increases. Based on the December 2019 Eurosystem staff macroeconomic projections, the euro area general government deficit ratio increased slightly in 2019 to 0.7% of GDP. The decline in the budget balance reflected the more expansionary fiscal stance, which was partly offset by savings in interest payments, while the contribution from the cyclical position remained broadly unchanged.
General government balance and fiscal stance
The aggregate general government debt-to-GDP ratio in the euro area continued to decline in 2019 and reached 84.5% of GDP at the end of the year. However, debt-to-GDP ratios remained high in a number of countries. The reduction in the aggregate debt ratio was supported by favourable interest rate-growth differentials and positive, but declining primary balances. While there were no euro area countries under the corrective arm of the Stability and Growth Pact (SGP) at the end of 2019, the European Commission assessed that the 2020 draft budgetary plans of eight euro area countries, many of which had debt ratios of close to or above 100% of GDP, posed a risk of non-compliance with the requirements under the SGP.
1.3 Inflationary pressures remained muted
Headline inflation in the euro area stood at 1.2% on average in 2019, down from 1.8% in 2018. This decline essentially reflected lower contributions from the two more volatile inflation components, energy and food. HICP inflation excluding energy and food, one measure of underlying inflation, remained at subdued rates, averaging 1.0% in 2019 as in 2018 and 2017, despite an increase towards the end of the year (see Chart 10).
HICP inflation and contributions by components
The decline in headline inflation was driven by lower energy and food inflation, while underlying inflation remained subdued
Developments in energy inflation were largely responsible for the decline in average headline inflation in 2019 compared with 2018. The contribution of total food inflation to headline HICP inflation declined to 0.3 percentage points in 2019, from 0.4 percentage points in 2018. Developments in total food inflation within the year were largely determined by those in the volatile unprocessed food component. Processed food inflation hovered around 1.9% in 2019, which was slightly below the 2018 average. Increases in producer prices for consumer food and in food commodity prices (as captured by EU farm-gate prices), two drivers of processed food prices, suggest that such cost increases were not fully passed through to food prices at the consumer level in a context of high competition.
HICP inflation excluding energy and food, like other measures of underlying inflation, moved broadly sideways during most of the year and remained below its historical average, despite the mild increase at the end of 2019. Box 2 below discusses the relationship between underlying inflation and economic activity, as well as broader economic developments since the global financial crisis. Weak developments in both non-energy industrial goods and services inflation contributed to subdued HICP inflation excluding energy and food. Non-energy industrial goods inflation averaged 0.3% in 2019, unchanged from 2018 and the average since 2015. Indicators of price pressures at different stages of the pricing chain show that the annual rate of change of producer prices for non-food consumer goods remained broadly stable through the year, but was substantially higher than its average since 2015. This suggests that some of the cost increases have been absorbed at the retailer stage. In addition, unlike in 2018, the average annual rate of change of import prices for non-food consumer goods was positive in 2019, reflecting, among other factors, the depreciation of the euro. Services inflation displayed some volatility linked to price developments in travel-related services that resulted from a statistical effect. Looking through this monthly volatility, services inflation moved sideways and, on average, stood at 1.5% in 2019, unchanged from 2018 and only marginally higher than the average since 2015. Overall, the increases in services prices, which mostly include a large labour cost content, continued to lag behind wage growth.
The euro area Phillips curve and its interpretation of recent inflation developments
Since 2013 HICP inflation excluding energy and food has consistently remained below its historical average. While this could initially be explained by large amounts of economic slack and other factors dampening inflationary pressures, the more recent weakness is difficult to account for within a standard Phillips curve framework, as visible from the unexplained component of the decomposition of inflation developments in Chart A. This has prompted renewed scrutiny of this fundamental economic relationship.
Phillips curve-based decomposition of underlying inflation
Inflation determinants within the Phillips curve framework
In essence, the Phillips curve captures the notion that economic activity and the associated degree of tightness in goods and labour markets should influence inflation. High levels of economic slack weighed on inflation in the aftermath of the global financial crisis. The euro area also experienced a second recession between 2011 and 2013, and the weakness in underlying inflation starting in early 2013 is well explained by this factor. However, even if by 2018 many measures of economic activity and slack had returned to average levels, and some measures even started to show signs of excess demand, underlying inflation has remained below its average since 1999 (1.3%).
Besides economic activity, other factors, such as inflation expectations and external prices, are also crucial to understand inflation developments. Many factors can influence economic agents’ inflation expectations: recent inflation developments (and in particular energy price movements) typically influence expectations at short horizons, while genuine concerns about the credibility and attainability of a central bank’s inflation objective can weigh on longer-term expectations, although these factors are difficult to disentangle empirically. Both market and survey-based measures of inflation expectations weakened over the period 2014-17, which is reflected in their negative contributions to underlying inflation over the same period. More recently, survey measures of longer-term inflation expectations for the euro area, notably those from the ECB Survey of Professional Forecasters, have shown signs of a softening. However, the drag on inflation attributable to these recent developments is smaller.
Finally, measures of external prices, such as oil and broader import price indices, can be an important factor explaining firms’ pricing decisions, and thus developments in inflation, over and above what might already be captured by slack and inflation expectations. While external prices, and especially energy prices, are typically quickly reflected in headline inflation, their indirect effects on underlying inflation appear to have been limited in recent years. Overall, developments in underlying inflation appear to be explained reasonably well by standard factors up to 2017, but the more recent weakness is difficult to account for within this framework.
One possible explanation could be that standard measures of economic slack do not capture all developments in economic activity relevant for inflation. In that spirit, Jarociński and Lenza (2018) derive a measure of economic slack designed explicitly to forecast inflation. Such a measure would imply a much larger amount of economic slack than a more standard measure of the output gap.
Overall, the Phillips curve remains a central element for the interpretation and communication of inflation developments, but it needs to be complemented with information from other tools and approaches, especially in the light of recent developments in underlying inflation.
Domestic cost pressures, as measured by the growth in the GDP deflator, increased on average in 2019, at a rate above the average level of 2018 and the average since 2015 (see Chart 11). The annual growth in compensation per employee maintained its robust pace in 2019, standing at 2.0% on average, slightly below the 2018 average, but above its average since 2015. Compensation per employee growth was tempered by developments in social security contributions, while growth in wages and salaries increased in 2019 compared with 2018, in line with the further reduction in the unemployment rate and despite the moderation in economic growth in the euro area (see Section 1.2 above). The robust average growth in compensation per employee implied, however, an increase in unit labour cost growth as productivity stagnated in 2019. In addition to the higher unit labour cost growth, the increase in the GDP deflator growth also reflected a rebound in profit developments (measured in terms of the gross operating surplus), which had weakened noticeably in the course of 2018. Given that productivity moved sideways in 2019, the profit rebound in 2019 most likely reflected improvements in the terms of trade and developments in economic sectors that were less affected by the global activity and trade slowdown. These were for instance the construction and real estate sectors, which also displayed a high rate of growth in their value added deflators, going up to 4.6% on average in 2019 in the case of construction.
Breakdown of the GDP deflator
Longer-term inflation expectations declined in the course of 2019. Expectations for inflation five years ahead from the ECB Survey of Professional Forecasters eased to 1.7% in the fourth quarter of 2019 from 1.9% in the fourth quarter of 2018. Market-based measures of longer-term inflation expectations, such as the five-year inflation-linked swap rate five years ahead, also declined. However, they stabilised – albeit at still low levels – towards the end of the year.
1.4 Favourable financing conditions continued to support credit and money growth
In 2019 euro area financial markets were driven primarily by the effects of slowing economic activity amid persistently low inflation, uncertainty related to political factors inducing risk-off sentiment in some periods of the year, and further monetary policy easing. Both money market rates and longer-term bond yields declined significantly, while equity prices increased overall, supported by lower discount rates. The external financing flows of non-financial corporations (NFCs) broadly stabilised in 2019 at a level significantly below their latest peak in 2017, but borrowing from banks and the issuance of debt securities remained solid, supported by favourable financing conditions, and net issuance of unlisted shares was robust, underpinned by an increased number of mergers and acquisitions. The ongoing expansion of bank credit to the private sector, coupled with the low opportunity costs of holding M3, helped to sustain the growth rates of broad money. Favourable financing conditions reflected the ECB’s accommodative monetary policy stance and the capacity of the banking system to pass this accommodation on to the lending rates faced by firms and households. Increasing valuations of financial asset and real estate holdings supported household wealth, which in turn underpinned private consumption growth.
Euro area government bond yields declined significantly in 2019, albeit recovering since September
Euro area government bond yields declined significantly in 2019, with long-term yields reaching negative levels during the summer. This decline reflected growing concerns about the extent and duration of the slowdown in euro area economic activity and its impact on inflation developments. Monetary policy accommodation in the United States, heightened global risk sentiment connected to the US-China trade tensions and Brexit, and growing expectations in financial markets about a further easing of monetary policy by the ECB also contributed to lower risk-free rates in the euro area. After the ECB’s monetary policy easing package was announced in September, somewhat more positive euro area macroeconomic data releases and some stabilisation in global risk sentiment contributed to a gradual recovery of euro area government bond yields. This notwithstanding, the euro area GDP-weighted average of ten-year sovereign bond yields stood at 0.28% on 31 December 2019, which was 74 basis points lower than its level on 1 January 2019. The spread of euro area countries’ ten-year sovereign bond yields against the German ten-year Bund yield declined, significantly so for some countries, owing to lower fiscal policy uncertainty.
Ten-year sovereign bond yields in the euro area, the United States and Germany
Euro area equity prices increased on account of lower discount rates
In 2019 euro area equity prices increased significantly. The broad index for euro area NFC equity prices increased by 20.7% over the course of 2019, while an index of euro area bank equity prices rose by 9.7% (see Chart 13). Lower discount rates were the main supporting factor behind the equity price developments, while earnings expectations remained weak and movements in risk premia – primarily related to evolving developments in the US-China trade dispute and Brexit negotiations – weighed on equities.
Equity market indices in the euro area and the United States
NFCs’ borrowing from banks and issuance of debt securities were solid
The external financing flows of NFCs broadly stabilised in 2019, significantly below their latest peak in 2017 (see Chart 14). This said, the growth of borrowing from banks and the issuance of debt securities remained solid, supported by favourable financing conditions, and net issuance of unlisted shares was robust, underpinned by an increase in the number of mergers and acquisitions. By contrast, there was moderation in the other sources of financing (including inter-company loans and trade credit) and a decline in the net issuance of listed shares (which reflected the elevated cost of equity compared with other sources of funding). Bank lending rates declined further – broadly in line with the evolution of market rates – to new historical lows during 2019.
Further monetary policy easing by the ECB during 2019 was transmitted to financing conditions, which became more favourable. This was partly due to the fact that some of the measures introduced in 2019 – such as the third series of targeted longer-term refinancing operations (TLTRO III) and the two-tier system for reserve remuneration – were geared towards supporting bank intermediation capacity (see Section 2.1). At the same time, the banking system made further progress in balance sheet repair, in terms of boosting capital positions and improving asset quality.
Net flows of external financing to non-financial corporations in the euro area
Household wealth was supported by increased valuations of real and financial assets
Households’ net wealth increased strongly in the first three quarters of 2019, thereby underpinning private consumption. Despite a moderating momentum in housing markets, net wealth benefited from further house price increases, which resulted in significant valuation gains on households’ real estate holdings. In addition, households also registered notable valuation gains on their financial asset holdings. Furthermore, rising house prices and favourable financing conditions contributed to the continued gradual upward trend in the annual growth rate of bank loans to households for house purchase. Household gross indebtedness – measured as a percentage of household nominal gross disposable income – remained at levels well above its average pre-crisis level.
M3 and credit growth recovered in 2019
Overall, bank lending to the private sector was solid, with its annual growth rate (adjusted for loan sales, securitisation and notional cash pooling) increasing to 3.7% in December 2019, from 3.4% in December 2018. Credit growth remained the largest driver of broad money growth (see the blue parts of the bars in Chart 16). At the same time, external monetary flows made an increasing contribution to M3 dynamics (see the yellow parts of the bars in Chart 16). Annual M3 growth thus recovered in 2019 (see Chart 15). While the termination of net purchases under the asset purchase programme at the end of 2018 had a dampening impact on M3 growth (see the red parts of the bars in Chart 16), their resumption in November 2019 only had a limited influence on broad money growth in 2019.
M3 and loans to the private sector
M3 and its counterparts
Most of M3 growth reflected increased holdings of overnight deposits
From an instrument perspective, overnight deposits continued to be the main driver of M3 growth, given the low opportunity cost of holding liquid deposits in an environment characterised by very low interest rates and a flat yield curve. Growth in overnight deposits reflected the strong expansion of overnight deposits held by both households and NFCs. As a result, the narrow monetary aggregate M1, which comprises currency in circulation and overnight deposits, continued to grow at a robust pace.
2 Monetary policy: determination to act as appropriate
Against the background of a weakening of the euro area economy, more persistent downside risks and an inflation outlook that continued to fall short of the medium-term inflation aim of the Governing Council of the ECB, the Governing Council provided three successive rounds of additional monetary accommodation over the course of 2019. These successive interventions underlined the Governing Council’s determination to act as appropriate to support the return of inflation to a sustained convergence path towards its medium-term aim. In view of the time needed for all of the measures to exert their full impact on the euro area economy, the Governing Council continued to closely monitor inflation developments and the pass-through of the unfolding monetary policy measures, while it remained ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner, in line with its commitment to symmetry. At the end of 2019 monetary policy-related assets accounted for 70% of the total assets on the Eurosystem’s balance sheet. The size of the balance sheet stabilised at €4.7 trillion in 2019, in line with the level reached at the end of the previous year. Risks related to the large balance sheet continued to be mitigated by the ECB’s risk management framework.
2.1 A first round of monetary policy measures to keep policy accommodation ample amid rising external headwinds
Following the deterioration in the economic outlook at the end of 2018, incoming information in early 2019 continued to be weaker than expected owing to softer external demand and some country and sector-specific factors, pointing to less buoyant near-term growth momentum than previously anticipated. At the same time, there was considerable uncertainty as to whether the factors slowing down euro area growth would be transitory or longer lasting, and hence to what extent slower growth in the short term would affect the medium-term growth outlook. Against this background, the Governing Council recognised that the risks surrounding the euro area growth outlook had moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility. The Governing Council highlighted that monetary policy needed to remain patient, prudent and persistent. While supportive financing conditions, favourable labour market dynamics and rising wage growth would continue to underpin the euro area expansion and gradually rising inflationary pressures, the Governing Council reiterated the need for significant monetary policy stimulus to ensure a continued sustained convergence of inflation to levels below, but close to, 2% over the medium term.
The more sluggish economic momentum slowed the adjustment of inflation towards the medium-term aim, prompting the introduction of a first policy package
Incoming economic data during the spring continued to be weak, pointing to a sizeable moderation in the pace of the economic expansion that would extend into 2019. In particular, activity in the manufacturing sector had decelerated markedly, mainly on account of external headwinds, as global growth and trade dynamics remained weak. The more sluggish economic momentum was slowing the adjustment of inflation towards the Governing Council’s medium-term aim.
In response to a material downgrade of the growth and inflation outlook, the Governing Council therefore decided at its March meeting on a package of policy measures to provide additional monetary accommodation. This would support the further build-up of domestic price pressures and headline inflation developments over the medium term and increase the resilience of the euro area economy in an environment of global uncertainties. In particular, the Governing Council decided on the following measures. First, it decided to shift out the calendar-based leg of its forward guidance on policy rates. More specifically, the Governing Council expected to keep the key ECB interest rates at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels in line with its medium-term aim. Second, it reiterated the intention to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme (APP) for an extended period of time past the date when it started raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. Given the link between the forward guidance on policy rates and reinvestments, the expected reinvestment horizon was automatically shifted out, reinforcing the guidance on policy rates while underlining the Governing Council’s determination to act as appropriate. Third, in addition to the change in policy rate guidance, a new series of quarterly targeted longer-term refinancing operations (TLTRO III) was announced. These operations would start in September 2019 and end in March 2021, and each operation would have a maturity of two years. The new series of TLTROs aimed to preserve favourable bank lending conditions to keep bank credit flowing to customers on affordable terms. In turn, a healthy credit flow to the private sector underpinned the consumption and investment plans of households and businesses, helping the economy to grow and supporting the adjustment of inflation towards the Governing Council’s medium-term aim. Fourth, the Governing Council decided to continue to conduct the Eurosystem’s lending operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021.
Following the announcement of the new series of TLTROs, at its next monetary policy meeting, the Governing Council communicated that the precise terms of the TLTRO III series would be announced at one of the forthcoming meetings. In particular, the pricing of the TLTRO III operations would take into account a thorough assessment of the bank-based transmission channel of monetary policy, as well as further developments in the economic outlook. In addition, the Governing Council, bearing in mind that the negative interest rate environment would prevail for longer than previously anticipated, noted that in the context of its regular assessment, it would consider whether the preservation of the favourable implications of negative interest rates for the economy would require the mitigation of their possible side effects, if any, on bank intermediation.
A second round of additional monetary policy accommodation and deteriorating confidence in the inflation outlook
By mid-year, the incoming information indicated that global headwinds continued to weigh on the euro area outlook
By mid-year, the incoming information indicated that global headwinds, relating in particular to the ongoing weakness in global trade and more pervasive and prolonged uncertainties in the external environment, continued to weigh on the euro area outlook. These factors were weighing in particular on the euro area manufacturing sector. Furthermore, HICP inflation decreased further, mainly on account of temporary factors, and measures of underlying inflation continued to move sideways.
In the light of the prolongation of uncertainties and their implications for the inflation outlook, the Governing Council recognised the need to adjust the monetary policy stance for the second time in 2019 and provide additional monetary accommodation for inflation to remain on a sustained path towards its medium-term aim. Therefore, the Governing Council decided at its June meeting to strengthen its forward guidance on policy rates by shifting out further the calendar-based element of the forward guidance. More specifically, the Governing Council stated that it expected the key ECB interest rates to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its medium-term aim. In addition, it reiterated its forward guidance on reinvestments. Finally, the Governing Council also decided on the pricing of the TLTRO III series. The interest rate in each operation would be set at a level that was 10 basis points above the average rate applied in the Eurosystem’s main refinancing operations. For banks whose eligible net lending exceeded a benchmark, the rate applied in TLTRO III would be lower, and could be as low as the average interest rate on the deposit facility plus 10 basis points. It was noted that this pricing struck a reasonable balance between acknowledging the sound developments in bank lending, on the one hand, and the importance of preserving the accommodative stance, on the other hand.
Over the course of the summer, softening global growth dynamics and weak international trade continued to weigh on the euro area outlook. In addition, the prolonged presence of uncertainties continued to dampen business sentiment, especially in the manufacturing sector. Price developments, in turn, remained muted, while measures of underlying inflation continued to move sideways. Market-based measures of longer-term inflation expectations had stagnated at the historical lows reached after the June meeting, while surveys signalled a marked fall in longer-term expectations.
The Governing Council noted that realised and projected inflation rates had been persistently below levels that were in line with its aim
Against this background, the Governing Council, at its July meeting, noted that inflation rates (both realised and projected) had been persistently below levels that were in line with its aim. Moreover, the Governing Council viewed the symmetry of its medium-term inflation aim as an important element to bolster the achievement of a sustained adjustment in inflation to its aim. It was hence seen as important for the Governing Council to demonstrate its determination and capacity to act and to be prepared to ease the policy stance further by adjusting all of its instruments, as appropriate, to achieve its inflation aim. At the same time, the Governing Council stated that if the medium-term inflation outlook continued to fall short of its aim, it was determined to act, in line with its commitment to symmetry in the inflation aim. Hence, in this context, the Governing Council decided to reintroduce a so-called easing bias in its forward guidance on policy rates by stating that it expected to keep the key ECB interest rates at present or lower levels. In addition, it tasked the relevant Eurosystem Committees with examining options, including ways to reinforce the forward guidance on policy rates, mitigating measures (e.g. the design of a tiered system for reserve remuneration) and possibilities for the size and composition of potential new net asset purchases. These announcements paved the way for the potential implementation of a comprehensive policy package at the Governing Council’s next monetary policy meeting if the inflation outlook failed to improve in line with its aim.
A third round of policy accommodation with a comprehensive package of measures in response to persistently low inflation rates
The September 2019 ECB staff macroeconomic projections showed a further downgrade of the inflation outlook. Overall, the Governing Council was confronted with a protracted slowdown in the euro area economy, persistent downside risks and an inflation outlook that continued to fall short of its medium-term inflation aim. In particular, successive and significant downward revisions to the inflation outlook had brought projected inflation in 2021 down from 1.8% in the December 2018 projections to 1.5% in the September 2019 projections. The further downgrade of the inflation outlook – despite the fact that the financial conditions embedded in the projections already reflected substantial expectations of additional policy easing – meant that inflation was projected to move further away from levels that the Governing Council considered to be consistent with its inflation aim. Measures of underlying inflation remained muted and indicators of inflation expectations remained at low levels. Against this background, the Governing Council agreed that a third round of easing of the monetary policy stance was warranted to support the return of inflation to a sustained convergence path towards its inflation aim. The Governing Council therefore took the following decisions in September:
A comprehensive policy response was deemed necessary to support the return of inflation to a sustained convergence path towards the medium-term aim
First, it decided to reduce the deposit facility rate, by 10 basis points, to -0.50% (see Chart 17). The reduction in the deposit facility rate was accompanied by a reformulation of the Governing Council’s forward guidance on the expected path of policy rates. It now expected that the key ECB interest rates would remain at their present or lower levels until the inflation outlook was seen to robustly converge to a level sufficiently close to, but below, 2% within the projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
Key ECB interest rates
Second, it decided to restart net purchases of bonds under the APP at a monthly pace of €20 billion as from 1 November (see Chart 18) with the expectation to terminate net purchases shortly before the Governing Council started to raise the key ECB interest rates. The Governing Council also reiterated that it would continue to reinvest, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it started to raise the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Monthly net asset purchases and total redemptions under the APP in 2019
Third, it decided to recalibrate the third series of TLTROs with a more attractive interest rate for participating banks (banks outperforming a minimum lending benchmark could now borrow at a rate that could be as low as the average interest rate on the deposit facility prevailing over the life of the operation) and a longer maturity (three years instead of two years). The more favourable TLTRO conditions sought to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy.
Finally, to safeguard the bank-based transmission of monetary policy, a two-tier system for reserve remuneration was introduced which exempts a fraction of banks’ excess cash reserves from the negative deposit facility rate.
All elements of the package of measures decided upon at the Governing Council’s September monetary policy meeting were designed to complement each other in providing monetary stimulus and support the convergence of inflation towards the Governing Council’s aim. The reduction in the deposit facility rate and the strengthened state-contingent forward guidance served to anchor short to medium-term interest rates, which are important for pricing loans to firms in the euro area. The renewed net asset purchases and the expected reinvestment horizon anchored medium to longer-term interest rates, which are important for pricing mortgage loans to households. TLTRO III was recalibrated to preserve favourable bank lending conditions, ensure a smooth transmission of monetary policy and incentivise banks to keep credit flowing to their customers. Finally, the two-tier system for reserve remuneration was designed to alleviate the direct cost of negative interest rates for banks in order to support the bank-based transmission of monetary policy. Consequently, easier market funding conditions continued to be passed through to the lending conditions faced by firms and households.
Monitoring inflation developments in the light of a tentative stabilisation in the growth outlook, while standing ready to act
By year-end, following three rounds of monetary policy easing over the course of 2019, measures of underlying inflation remained generally subdued and euro area growth dynamics continued to be weak, although there were some initial signs of stabilisation in the growth slowdown and of a mild increase in underlying inflation in line with previous projections. In the light of these developments and given that it took time for all of the measures to exert their full impact, the Governing Council announced at its December meeting that it was closely monitoring inflation developments and the pass-through of the unfolding monetary policy measures taken in September to the economy. In any case, it underlined that it continued to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner, in line with its commitment to symmetry.
In the light of the persistent uncertainties and downside risks, substantial additional monetary policy accommodation was implemented over the course of 2019. All elements of the measures taken continued to work together and contributed to a further decline in bank funding costs (see Chart 19). Banks’ very favourable financing conditions were passed on to the wider economy, with borrowing conditions for firms and households standing at – or close to – their historical lows (see Chart 20). All decisions taken over the course of 2019 contributed to the ample degree of monetary policy accommodation introduced since 2014 and continued to support the improvement in the economic performance of the euro area.
Composite cost of debt financing for banks
Composite bank lending rates for non-financial corporations and households
2.2 Eurosystem balance sheet dynamics amid the restart of net asset purchases
The size of the Eurosystem’s balance sheet remained unchanged in 2019
Since the onset of the global financial crisis in 2007-08, the Eurosystem has taken a variety of standard as well as non-standard monetary policy measures, which have had a direct impact on the size and composition of the Eurosystem’s balance sheet over time. The non-standard measures have included refinancing operations to provide funding to counterparties with an initial maturity of up to four years, as well as purchases of assets issued by private and public entities (under the APP). In December 2018 the Eurosystem ended net asset purchases under the APP and, in 2019, it fully reinvested the principal payments from maturing securities. As of 1 November 2019 the Eurosystem restarted net asset purchases at an average monthly pace of €20 billion. At the end of 2019 the size of the Eurosystem’s balance sheet stood at €4.7 trillion, unchanged from the level at the end of 2018.
At the end of 2019 monetary policy-related assets amounted to €3.3 trillion, accounting for 70% of the total assets on the Eurosystem’s balance sheet (down from 72% at the end of 2018). These monetary policy-related assets include loans to euro area credit institutions, which accounted for 13% of total assets (down from 16% at the end of 2018), and assets purchased for monetary policy purposes, which represented around 56% of total assets (unchanged from the end of 2018) (see Chart 21). Other financial assets on the balance sheet mainly consisted of foreign currency and gold held by the Eurosystem and euro-denominated non-monetary policy portfolios.
On the liabilities side, the overall amount of counterparties’ reserve holdings and recourse to the deposit facility remained broadly unchanged at €2 trillion and represented 39% of the liabilities side at the end of 2019, unchanged from the end of 2018. After the announcement of the two-tier system for reserve remuneration, effective from 30 October 2019, counterparties’ cash holdings with the Eurosystem significantly shifted towards reserve holdings at the expense of recourse to the deposit facility. At the end of 2019 the latter represented 15% of counterparties’ overall cash holdings with the Eurosystem, down from 34% at the end of 2018. Banknotes in circulation grew in line with the historical growth trend and accounted for 28% of liabilities at the end of 2019, up from 26% at the end of 2018. Other liabilities, including capital and revaluation accounts, accounted for 34%, unchanged from the end of 2018 (see Chart 21).
Evolution of the Eurosystem’s consolidated balance sheet
Average APP portfolio maturity and distribution across assets and jurisdictions
The APP comprises four active asset purchase programmes: the third covered bond purchase programme (CBPP3), the asset-backed securities purchase programme (ABSPP), the public sector purchase programme (PSPP) and the corporate sector purchase programme (CSPP). Following the Governing Council decisions, the monthly net purchase targets for the APP have changed over time.
At the end of 2019 APP holdings amounted to €2.6 trillion
At the end of 2019 APP holdings amounted to €2.6 trillion (at amortised cost). The ABSPP accounted for 1% (€28 billion), the CBPP3 for 10% (€264 billion) and the CSPP for 7% (€185 billion) of total APP holdings at the year-end. Out of the private sector purchase programmes, the CSPP contributed the most to the growth in APP holdings in the last two months of 2019, with €7.7 billion of net purchases. CSPP purchases are made based on a benchmark which reflects the market capitalisation of all eligible outstanding bonds.
The PSPP accounted for 82% of total APP holdings
The PSPP accounted for the bulk of the APP holdings, amounting to €2.1 trillion or 82% of total APP holdings at the end of 2019, the same proportion as at the end of 2018. Under the PSPP, the allocation of purchases to jurisdictions was guided by the ECB’s capital key on a stock basis. Within the individual purchase allocations assigned to euro area national central banks (NCBs), NCBs had the flexibility to choose between purchases of central government securities, regional government securities, and securities issued by agencies established in the respective jurisdictions. Some NCBs also purchased securities issued by EU supranational institutions. The ECB did not purchase any debt securities issued by EU supranational institutions or regional government bonds. The weighted average maturity of the PSPP holdings stood at 7.12 years at the end of 2019, somewhat lower than the 7.37 years at the end of 2018, with some variation across jurisdictions.
The Eurosystem reinvested the principal payments from maturing securities held in the APP portfolios. Redemptions under the private sector purchase programmes amounted to €37.2 billion in 2019, while redemptions under the PSPP amounted to €167.3 billion. The assets purchased under the PSPP, the CSPP and the CBPP3 continued to be made available for securities lending in order to support bond and repo market liquidity.
Developments in Eurosystem refinancing operations
The outstanding amount of Eurosystem refinancing operations decreased by €109.3 billion since the end of 2018, standing at €624.1 billion at the end of 2019. This can be largely attributed to the voluntary repayments of €208 billion of the TLTRO II series. The amount of €101.1 billion allotted in the first two operations of the TLTRO III series only partially compensated for the decline in outstanding refinancing operations due to TLTRO II repayments. The weighted average maturity of outstanding Eurosystem refinancing operations decreased from around 1.8 years at the end of 2018 to around 1.2 years at the end of 2019.
2.3 Financial risks associated with the APP are mitigated through appropriate frameworks
Risk efficiency is a key principle of the Eurosystem’s risk management function
The main objective of the renewed net asset purchases under the APP is to support the robust convergence of inflation towards the Governing Council’s medium-term aim. At the same time, asset purchases should be both necessary and proportionate to fulfil the ECB’s mandate and achieve its price stability objective. When there are several options to fulfil the policy objectives, the option selected should be efficient both from an operational as well as from a risk perspective. In that context, the Eurosystem’s risk management function endeavours to attain risk efficiency: achieving the policy objectives with the lowest amount of risk for the Eurosystem.
All monetary policy instruments, including outright asset purchases, inherently involve financial risks, which are managed and controlled by the Eurosystem. The outright asset purchases require specific financial risk control frameworks which depend on the specific policy objectives and on the features and risk profiles of the asset types involved. Each of these frameworks consists of eligibility criteria, credit risk assessments and due diligence procedures, pricing frameworks, benchmarks and limits. The APP risk control frameworks apply to the purchase of additional assets, the reinvestment of principal payments from maturing APP holdings, and APP holdings for as long as they remain on the Eurosystem’s balance sheet.
Outright asset purchases require specific risk control frameworks
The risk control frameworks not only serve the purpose of mitigating financial risks, but also contribute to a successful achievement of the policy objectives by steering asset purchases towards a diversified market-neutral asset allocation. In addition, the design of the risk control frameworks also takes into consideration non-financial risks such as legal, operational and reputational risks.
In the following, the current financial risk control frameworks governing the implementation of the APP are described. Table 1 summarises the key elements of the applicable frameworks.
Key elements of the risk control frameworks for the APP
Eligibility requirements for outright asset purchases
Eligibility criteria apply to all asset classes
Only marketable assets which are accepted as collateral for Eurosystem credit operations are potentially eligible for outright asset purchases. The collateral eligibility criteria for Eurosystem credit operations are stated in the general framework for monetary policy instruments. Among other things, eligible assets are required to meet high credit quality standards by having at least one credit rating provided by an external credit assessment institution (ECAI) accepted within the Eurosystem credit assessment framework (ECAF) qualifying as credit quality step 3 (CQS 3) of the Eurosystem’s harmonised rating scale or higher (CQS 1 and CQS 2). Furthermore, assets must be euro-denominated and issued and settled in the euro area. In the case of asset-backed securities (ABSs), the debtors underlying the respective claims must be predominantly located in the euro area.
In addition to the eligibility criteria above, specific eligibility criteria apply depending on the purchase programme. For instance, for the PSPP and the CSPP, there are minimum and maximum maturity restrictions in place. For the CSPP, assets issued by credit institutions, or by issuers for which the parent undertaking is a credit institution, are not eligible for purchase. Moreover, for the CSPP and the CBPP3, assets issued by wind-down entities and asset management vehicles are excluded from purchases. In the CBPP3, the assets must fulfil the necessary conditions for their acceptance as own-use collateral for Eurosystem credit operations, i.e. they can be used as collateral by the issuing credit institution. Furthermore, conditional pass-through covered bonds ceased to be eligible for purchase from 1 January 2019. In addition, asset purchases must not circumvent the rules prohibiting the monetary financing of public authorities as set out in Article 123(1) of the Treaty on the Functioning of the European Union.
Credit risk assessments and due diligence procedures
Credit risk assessments and due diligence procedures are conducted on an ongoing basis
For the private sector purchase programmes, the Eurosystem conducts appropriate credit risk assessments and due diligence procedures on the purchasable universe on an ongoing basis. Monitoring frameworks are maintained using certain risk indicators. These assessments and procedures follow the principle of proportionality, where riskier assets are subject to more in-depth analysis. If warranted, additional risk management measures may apply, also subject to the principle of proportionality. These include in particular limitations on or the suspension of purchases and, in extraordinary cases, even sales of assets, which require a case-by-case assessment by the Governing Council.
The pricing frameworks ensure that purchases are made at market prices
The pricing frameworks for the APP ensure that purchases are made at market prices in order to minimise market distortions and facilitate the achievement of risk efficiency. These frameworks take into account available market prices, the quality of such prices and fair values. Ex post price checks are also conducted in order to assess whether the transaction prices reflected market prices at the time of the transactions.
Purchases of eligible debt instruments with a negative yield to maturity are permissible in all asset purchase programmes including, to the extent necessary, those with a yield below the deposit facility rate.
Benchmarks are used to ensure diversification
Benchmarks are used to ensure the build-up of a diversified portfolio and contribute to mitigating risks. The benchmarks for the private sector purchase programmes are guided by the market capitalisation of the purchasable universe, i.e. the nominal outstanding amounts of the eligible assets satisfying risk considerations. In the case of the PSPP, the ECB’s capital key guides the allocation of purchases per jurisdiction on a stock basis.
Issue and issuer limits are an effective tool to limit risk concentration
Limit frameworks are in place for the APP. The calibration of issue and issuer limits takes into account policy, operational, legal and risk management considerations. The limits are fine-tuned according to the asset class, with a distinction being made between public sector assets and private sector assets.
PSPP issue and issuer limits are applied to safeguard market functioning and price formation, to limit risk concentration and to ensure that the Eurosystem does not become a dominant creditor of euro area governments. The issue limit for PSPP-eligible supranational bonds is 50% of the outstanding amount of the asset issued. For all other PSPP-eligible bonds, the issue limit is set at 33% of the outstanding amount of the issue, subject to a case-by-case verification that it would not lead to the Eurosystem having a blocking minority for the purpose of collective action clauses. Otherwise, the issue limit is 25%. The issuer limit for supranational issuers is set at 50% of the outstanding amount of eligible assets issued by the respective institution; for other eligible issuers, it is 33%.
For the private sector purchase programmes, the issue limit is 70%. In the CSPP, lower issue limits apply in specific cases, for example for assets issued by public undertakings, which are dealt with in a manner consistent with the treatment under the PSPP. In addition to these issue limits, issuer limits are applied for the CBPP3 and the CSPP. For the CSPP, the issuer limits are defined based on a benchmark allocation related to an issuer group’s market capitalisation in order to ensure a diversified allocation of purchases. Moreover, lower limits may apply if warranted based on the outcome of the credit risk assessment and due diligence procedures, as explained above.
3 Euro area financial sector: increasing bank resilience amid risks
The risk environment confronting the euro area financial sector remained challenging during 2019. On the one hand, several factors supported financial stability, including a growing economy and the sound capitalisation of euro area banks. On the other hand, increasing downside risks to future growth weighed on the financial stability environment. Strong risk-taking in financial and real estate markets continued to fuel the build-up of asset price vulnerabilities, while risks continued to increase in the growing non-bank financial sector. In this environment, euro area countries, in consultation with the ECB, implemented a number of macroprudential measures to mitigate and build up resilience to systemic risks. In addition, ECB Banking Supervision took microprudential actions and contributed to a stable European banking sector. In 2019 the ECB also continued to contribute to the discussions on completing the banking union and advancing the capital markets union, and highlighted the importance of developing tools to mitigate risks in the non-bank financial sector.
3.1 The financial stability environment in 2019
The financial stability environment remained challenging during 2019. The global economic outlook deteriorated during the year and elevated political and policy uncertainty posed large downside risks. In this setting, markets were increasingly driven by expectations of further monetary policy easing and by a flight to safety. This led to significantly lower yields on higher-rated sovereign and corporate bonds. The environment characterised by low (or negative) interest rates and low yields on safe assets challenged financial institutions’ profitability. In response, investment funds and insurers took on greater risks. The deteriorating growth outlook and the associated expected “lower-for-longer” interest rate environment weakened bank profitability prospects further. Banks were however supported by abating funding challenges amid lower funding costs and improved bond market access and they remained adequately capitalised, with a 14.2% Common Equity Tier 1 (CET1) ratio.
Four key financial stability vulnerabilities were identified
Four key financial stability vulnerabilities for the euro area over a two-year horizon were identified by the ECB during 2019 and discussed in the ECB’s semi-annual Financial Stability Review (see Figure 1):
Key financial stability vulnerabilities in the euro area
- First, asset price vulnerabilities remained prominent during 2019, with the ECB highlighting the risk of a disruptive repricing in global financial markets. The search for yield intensified during 2019, with stock prices in the euro area increasing some 20% despite lower corporate profits and the deteriorating macroeconomic environment, and less than 10% of the bonds outstanding globally offering yields of 3% or more. Abrupt corrections in equity and lower-rated fixed income markets therefore remained a risk, especially in the face of high economic and political uncertainty. Buttressed by the low interest rate environment, euro area property prices continued to rise in 2019. The warnings and recommendations issued by the European Systemic Risk Board with regard to residential real estate vulnerabilities indeed suggested that continued strong price dynamics, coupled with relatively buoyant mortgage lending growth and high household indebtedness, represented key vulnerabilities in a number of countries (see Section 3.2).
- Second, public and private debt sustainability concerns continued to linger in several countries, with debt in the public and/or non-financial private sectors often at levels that were high by historical and international standards. Although low financing costs alleviated near-term debt sustainability pressures, public and private finances remained exposed to the risk of a sudden change in market sentiment or deteriorating macroeconomic conditions. A sudden upward correction in interest rates from their very low levels could be particularly harmful for households and non-financial corporations in countries where loans with floating interest rates predominate.
- Third, vulnerabilities increased in the euro area banking sector. Euro area banks’ profitability remained low in 2019 and profitability prospects weakened against the backdrop of the deteriorating growth outlook and the lasting low interest rate environment. Although the stock of non-performing loans continued to decline at a moderate pace, further improvements were needed in parts of the banking sector. Overcapacity and cost inefficiencies also continued to weigh on banks’ long-term profitability prospects in many cases.
- Fourth, vulnerabilities continued to build up in the non-bank financial sector as a result of increased risk-taking. Investment funds and insurers continued to take on risks in response to declining yields on higher-rated assets. At the same time, the decline in highly liquid assets and pockets of high leverage in the investment fund sector raised concerns about the potential for sudden and large redemptions and investment behaviour that could amplify any market volatility.
Other vulnerabilities beyond the short to medium-term horizon with a potential negative impact on the financial sector were also highlighted by the ECB during 2019. Notably, efforts to assess the financial stability implications of climate change were stepped up, with enhanced communication on the topic. The ECB is aiming to contribute, within its mandate, to the general efforts to mitigate the potential negative effects of climate change, focusing on several key areas (see Box 3). Closer to home, as regards the ECB’s efforts to reduce its own environmental impact, carbon emissions per workplace were reduced by 74% between 2008 and 2018 (see also Box 3). In addition, during 2019 the ECB looked at the implications of developments in financial technology at both the micro- and macroprudential levels (see Box 4).
The ECB and climate change
Climate-related risks (also known as risks related to global warming) have become increasingly important for the financial system and the economy at large through two main channels: physical risks and transition risks. Physical risks are related, inter alia, to the increased severity and frequency of adverse weather events. The materialisation of these risks has adverse impacts on asset values, prices of goods and collateral in affected areas, and hence causes losses for many actors, including insurance companies as well as banks and other financial institutions. Physical risks are already materialising and are on the rise globally. Transition risks relate to the possible side effects and costs of policies aimed at climate risk mitigation. The resulting adjustment towards a low-carbon economy can take place in an orderly or disorderly manner. For example, an abrupt introduction of policies or the impact of new technologies could trigger market risks for banks and other investors owing to unexpected asset price decreases and potential fire sales of carbon-intensive assets. Furthermore, the transition or related policies may lower the profitability of carbon-intensive firms, leading to higher credit risks for banks exposed to these sectors. This may also lead to output losses and relative price changes.
Policymakers face a decision when considering tackling climate change: they can either embark now on possibly costly climate risk mitigation policies to ensure a timely and orderly transition to a low-carbon economy, or they can instead not take action and risk facing “the tragedy of the horizon” scenario, in which climate-related risks will be addressed too late, and sizeable transition and physical risks could materialise simultaneously. It has already been recognised that while environmental externalities should be primarily corrected by first-best policies, such as taxes, all authorities need to reflect on the appropriate response to climate change and related risks in their own area of competence. The ECB, in its monetary policy strategy review, will assess the possible involvement of the Eurosystem in tackling climate change risks, and see whether and how – acting within its mandate – it can contribute.
Against this background, the ECB may contribute within its mandate to the general efforts to mitigate the potential negative effects of climate change in areas where it can be most effective and where it is operationally feasible. More specifically, the ECB’s efforts are focused on the following key areas: (1) enhancing economic analysis, forecasting models and risk assessment; (2) developing the monitoring and assessment of financial stability risks, including climate risk stress testing; (3) banking supervision; (4) integrating climate risk considerations into its own investment and business operations; (5) assessing the impact of climate change on its monetary policy stance; (6) supporting EU and international fora, legislators and standard-setters in their work addressing the risks of climate change and incorporating sustainability considerations into financial decision-making; and (7) protecting the environment through its environmental management system.
1. Economic analysis, forecasting models and risk assessment
It is important and increasingly relevant for the ECB to take into account the effects of climate change and of climate change policies when assessing the outlook for price stability in the conduct of monetary policy. In this context, climate change will be part of the forthcoming monetary policy strategy review. The ECB has already been able to take into consideration the impact of climate change shocks and related policies in its core economic analysis. Technological policies and fiscal mitigation and adaptation policies, such as carbon taxation, typically have a direct impact on prices. The impact on inflation may also be indirect, via supply and demand conditions in the economy, which in turn affect investment and productivity growth. The needed climate-friendly policies therefore also have an effect on countries’ fiscal balances and the operational costs of corporations in exposed sectors, ultimately with implications for price-setting. Climate change itself may also lead to a gradual transformation of households’ behaviour and consumption patterns, with implications for growth dynamics, both in terms of the mean and the volatility of output growth. Such effects translate ultimately into impacts on wealth and potential output. The ECB is increasingly analysing the macro implications of climate change and related public policies. The findings of this work aim to better account for such aspects in the ECB’s regular economic analysis, forecasting models and risk assessment. The implications of climate change for the transmission channels of monetary policy and monetary analysis, and especially for credit provision, are also being considered.
2. Monitoring and assessment of financial stability risks
As a part of climate change adaptation, the ECB actively monitors physical and transition risks for banks and also non-bank financial institutions. This has required the development of a sufficiently granular understanding and monitoring of the carbon intensity of banks’ portfolios at the firm level, based on exposures to non-financial corporations and carbon emissions. There is also a parallel focus on developing an analytical framework for carrying out a pilot climate risk stress-test analysis for the euro area banking sector which will be macroprudential in nature. Importantly, this work has spanned all countries in the European Economic Area under the auspices of a joint project team on climate risk monitoring. The team, reporting to the European Systemic Risk Board’s Advisory Technical Committee and the European System of Central Banks’ Financial Stability Committee, has two aims: (i) to implement a monitoring framework for climate-related systemic risks; and (ii) to identify forward-looking scenarios to assess climate risks and transmission channels in a stress-test exercise. In the light of the global nature of the climate challenge, it is critical to develop a common understanding of the financial risks posed by climate change. In this respect, the ECB and several Eurosystem national central banks are members of the Network for Greening the Financial System (NGFS) and are playing an important role in shaping nascent work on gauging financial stability risks from climate change along with both the Financial Stability Board and the Basel Committee on Banking Supervision (BCBS).
3. Banking supervision
Climate-related risks are a significant risk driver for the euro area banking system. Surveys of banks conducted in 2019 by the ECB (covering around 44% of total euro area banking assets) found that euro area banks are getting increasingly involved in joint industry initiatives to enhance their own methodologies to measure climate-related risks and contribute to broader and more comparable disclosures. The ECB is of the view that banks should adopt a timely and strategic approach to considering these risks, consistent with the policy messages and expectations contained in the EBA Action Plan on Sustainable Finance published in December 2019. The ECB is actively cooperating with national competent authorities, financial regulators (e.g. the European Banking Authority and the BCBS) as well as other central banks and supervisors (notably through the NGFS) to further develop its supervisory approach to climate-related risks.
4. Investment operations
The ECB contributes to the efforts against climate change through its own investment decisions. The ECB’s staff pension fund pursues a sustainable investment policy, which seeks to reduce the ECB’s carbon footprint. For the ECB’s staff pension fund portfolio, the broad investment universe and the longer-term investment horizon allow a sustainable and responsible investment (SRI) policy, based on selective exclusion and proxy voting guidelines, to be pursued. The ECB delegated proxy voting for equity holdings to its external investment managers, who have signed up to the United Nations-supported Principles for Responsible Investment, requiring them to incorporate environmental, social and governance (ESG) standards into their voting policies. The ECB has also decided to replace the current broad benchmarks for the equity portfolios of its pension fund with the low-carbon versions of these benchmarks. The ECB is also working on the practical implementation of SRI principles in its own funds portfolio, which consists of its paid-up capital and its general reserve fund, as part of its participation in the NGFS and in line with the latter’s recently published SRI guide for central banks’ portfolio management.
5. Monetary policy operations
Following the principle of market neutrality, the Eurosystem has also purchased green bonds under its four asset purchase programmes (i.e. the asset-backed securities purchase programme, the corporate sector purchase programme, the public sector purchase programme and the third covered bond purchase programme) and is thereby supporting the ongoing efforts against climate change. The ECB supports initiatives aimed at improving the pricing of climate change risks and the assessment of related transition risks by private actors. This includes the development and enhancement by external credit assessment institutions recognised under the Eurosystem credit assessment framework of methodologies and standards for the integration of ESG criteria into their ratings, or the development of other more specific ESG-related scores.
The ECB critically monitors the extent to which climate change-related risks are priced and hence integrated into lending conditions, and considers whether additional measures are necessary to reflect climate change-related risks in the universe of collateral eligible for Eurosystem credit operations under the framework for marketable assets. More generally, the ways in which climate change can affect the ECB’s monetary policy operations are expected to be considered in the ECB’s monetary policy strategy review.
6. EU and international initiatives on sustainable finance
The ECB contributed to various European and international initiatives aimed at improving the collective response to climate change through the promotion of sustainable and green finance. At the EU level, the ECB welcomed the European Commission’s Action Plan on financing sustainable growth as an important step towards integrating sustainability into financial decision-making and actively supported the proposed development of a common EU taxonomy of sustainable assets as a key step for scaling up green financing. As a member of the Technical Expert Group on Sustainable Finance, which was set up to assist with the European Commission’s initiatives following up on its Action Plan, the ECB contributed to the preparation of a technical report published in June 2019, notably providing analytical input and technical support to the assessment of the economic impact of the taxonomy. The ECB has been cooperating more broadly with a larger set of central banks and financial regulators across the world to mainstream green finance and scale up the contribution of the financial sector to funding the transition to a green economy, notably within the framework of the NGFS and in international fora such as the G7.
7. Green ECB
As regards the ECB’s efforts to reduce its environmental impact, in 2019 the ECB was successfully recertified in accordance with the European Eco-Management and Audit Scheme (EMAS) and set new environmental objectives and took measures to strengthen its commitment to environmental protection and to the continuous improvement of its environmental performance. Several new measures were implemented during the year to mitigate the environmental impact of daily operations, such as electronic submissions for public tender procedures. The ECB has also entered into interinstitutional collaboration with the European Parliament to jointly offset residual CO2 emissions, whilst maintaining the avoidance and reduction of emissions as strategic priorities of its environmental management system. Raising awareness about the pressing challenges posed by climate change and the need to take meaningful action remained a central pillar of the ECB’s environmental management efforts. The ECB took part in the EU Mobility Week and the EU Week for Waste Reduction and offered training courses on climate change to staff. Compared with 2008, the ECB’s environmental activities have led to a reduction of carbon emissions and energy consumption per workplace by 74% and 54% respectively in 2018. More information on the ECB’s environmental performance is available in its environmental statement.
3.2 Macroprudential policy to build sector-wide resilience
Macroprudential policies are a key instrument to address risks to financial stability
The emergence of systemic risks in the financial system can be addressed through macroprudential policies and the SSM Regulation assigns an important role and specific powers to the ECB in this field. In particular, the ECB has the task of assessing macroprudential measures for banks provided for in EU legislation and adopted by national authorities in countries participating in the Single Supervisory Mechanism (SSM), and also has the power to top up such national measures. In response to the main risks prevailing in 2019, national authorities in the euro area, in consultation with the ECB, implemented notably more macroprudential measures than in the previous year, with a view to mitigating and strengthening resilience to systemic risks.
Continued macroprudential efforts to preserve financial stability
The ECB assesses macroprudential policies in euro area countries
The ECB continued its extensive efforts in the field of macroprudential policy, thereby making an important contribution to preserving financial stability. In addition to a body of related analytical work, the ECB provided a platform for regular joint risk assessments and policy coordination between the ECB and the national authorities in the euro area. The ECB and the national authorities also continued to engage in broad and open discussions on the use of macroprudential instruments, and on the enhancement of the analytical toolkit in the field of macroprudential policy. These efforts further improved the methods and processes for assessing systemic risks and the adequacy of macroprudential policy measures in the euro area.
Releasable macroprudential buffers can play an important countercyclical role
Macroprudential discussions in 2019 focused on the importance of banks remaining resilient and able to withstand adverse shocks to the macro-financial environment. Only with releasable buffers in place can macroprudential policy play a countercyclical role. In this context, the countercyclical capital buffer (CCyB) is the key instrument that can be released if cyclical risks materialise. A greater availability of releasable buffers in the form of CCyBs would thus help avoid a simultaneous deleveraging across the banking system, which could result in a credit crunch and aggravate the downturn. This underscores the relevance of not only the level of capital buffers, but also the ability to release them in times of stress. At this point in the euro area, the implemented CCyBs amount to 0.1% of risk-weighted assets and remain overall small relative to other buffer requirements (see Chart 22).
Decomposition of bank capital buffers
The ECB concluded a review of the O-SII buffer framework
In 2019 the ECB also concluded its first review of the buffer floor framework for other systemically important institutions (O-SIIs) in the SSM area. The O-SII buffer is aimed at limiting the negative externalities that a failure of systemically important institutions can pose to the domestic financial system and the wider economy. The revised O-SII floor methodology is more granular and increases the minimum buffer rates for the most systemically relevant banks (see the March 2020 Macroprudential Bulletin for more details). The new framework will help to ensure that more systemic banks can be subject to higher buffer requirements in certain jurisdictions, thus reducing risks to financial stability. It will be phased in starting from 1 January 2022.
Furthermore, the ECB continued to enhance its communication on macroprudential policy issues, raising awareness by making the ECB’s ongoing work and thinking in this field more transparent. The November 2019 Financial Stability Review contained a section on how macroprudential policies can address vulnerabilities in the financial system. Besides speeches, press releases and other publications such as occasional papers, the ECB continued publishing its biannual Macroprudential Bulletin, which is an important communication tool for explaining the ECB’s macroprudential policy framework and decision-making procedures, as well as analytical advances and assessments in the field. The ECB also continued to publish on its website an overview of currently active macroprudential measures in countries subject to ECB Banking Supervision.
Macroprudential policy decisions during 2019
The ECB assessed 106 macroprudential policy decisions in 2019
In line with its legal mandate, the ECB in 2019 assessed notifications by the national authorities in the euro area of 106 macroprudential policy decisions regarding instruments targeting cyclical and structural systemic risks, as well as other instruments under Article 458 of the Capital Requirements Regulation (CRR). Most notifications related to the setting of countercyclical capital buffers or the identification of global and other systemically important institutions (G-SIIs and O-SIIs) and the calibration of the respective capital buffers. The Governing Council of the ECB did not object to any of the macroprudential policy decisions that national authorities notified during 2019.
The national competent authorities of seven euro area countries had announced the activation of a CCyB rate above 0% by the end of 2019, compared with four countries in the previous year. In 12 countries the buffer had not been activated by the end of 2019. The calibration of the CCyB rates was based on “guided discretion”, which combines guidance from key risk indicators and more discretionary elements reflecting specific economic and financial conditions.
Looking at the countries that announced CCyB increases in 2019, the Haut Conseil de Stabilité Financière in France decided to raise the CCyB rate from 0.25% to 0.5% in March 2019 as a preventive measure and considering an upward trend in private sector indebtedness in France. The Nationale Bank van België/Banque Nationale de Belgique decided to raise the CCyB rate from 0% to 0.5% in June 2019, its main objective being to increase banks’ resilience to cyclical risks. While cyclical systemic risks were not seen as acute, it considered that it was prudent to introduce a preventive measure to ensure the continuity of credit provision through the cycle. The Bundesanstalt für Finanzdienstleistungsaufsicht in Germany decided in June 2019 to introduce a positive CCyB rate of 0.25%. It assessed that the build-up of cyclical systemic risks (in particular vulnerabilities related to the underestimation of credit risk, the overvaluation of collateral and interest rate risk) had created a potential threat to financial stability. In July 2019 Národná banka Slovenska decided to further increase the CCyB rate from 1.5% to 2% in Slovakia. The banking sector and its profitability had become more exposed to cyclical risks and the authority saw signs of exuberance in financial markets. Finally, in Luxembourg the Commission de Surveillance du Secteur Financier decided to increase the CCyB rate from 0.25% to 0.5% in December 2019, in the light of strong increases in lending and real estate prices.
Borrower-based measures can help maintain sound lending standards
The low interest rate environment could induce higher risk-taking and a loosening of lending standards, particularly if bank profitability is under pressure. Further increases in residential real estate prices, coupled with trends in mortgage lending and fragilities in the household sector, led to an increase in real estate vulnerabilities in 2019 in a number of euro area countries. In such a situation, guidance on sound lending standards or the pre-emptive tightening of borrower-based measures with appropriate exemptions could help contain a potential build-up of risks. By the end of 2019, 13 countries in the euro area had introduced such measures, which fall under the sole competence of the national authorities.
Regarding macroprudential instruments targeting other risks, the ECB assessed national authorities’ decisions on O-SII buffers, systemic risk buffers, as well as macroprudential measures under Article 458 of the CRR. As for measures adopted in 2019 in this latter category, Eesti Pank introduced a new measure to ensure the resilience of banks to systemic risks associated with housing loans. Credit institutions that use the internal ratings-based (IRB) approach must apply an exposure-weighted average risk weight of at least 15% to retail exposures secured by mortgages on immovable property granted to residents of Estonia. The measure came into force on 30 September 2019. The Finnish Financial Supervisory Authority also decided in June 2019 to extend the period of application for the credit institution-specific minimum level of 15% for the average risk weight on housing loans applicable to credit institutions that have adopted the IRB approach. The extension of the minimum level came into force on 1 January 2020 and will apply for one year.
Cooperation with the European Systemic Risk Board
The ECB continued to closely cooperate with and support the ESRB
The ECB continued to provide analytical, statistical, logistical and administrative support to the European Systemic Risk Board (ESRB) Secretariat, which is in charge of the day-to-day business of the ESRB. The ESRB is responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk.
The ECB regularly contributed to the ESRB’s ongoing identification and monitoring of potential systemic risks and provided general support to work undertaken by the ESRB. For example, the ECB was involved in the work on closing real estate data gaps, which led to the approval of an ESRB Recommendation, as well as in the development of an enhanced monitoring framework for material third countries. In addition, the ECB supported the ESRB’s analysis of medium-term vulnerabilities in the residential real estate sector, which led to five warnings and six recommendations being issued by the ESRB to selected EU countries.
The ECB also greatly contributed to the ESRB’s initial considerations on developing a common framework for the macroprudential stance. A dedicated report was published in April 2019 as a first step towards such a common framework. It established the link between macroprudential policies and the objective of financial stability. In addition, the ECB continued to contribute to the second phase of this work, by co-chairing the ESRB’s expert group mandated to develop operational methods to facilitate the assessment, discussion and communication of the macroprudential stance.
Furthermore, the ECB is co-chairing an analytical expert group tasked with assessing the materiality of the potential overlap between macroprudential capital buffers, the minimum leverage ratio and the minimum requirement for own funds and eligible liabilities (MREL). This work aims to describe how the requirements interact and the implications for the effectiveness of macroprudential buffers.
Throughout the year the ECB also chaired the drafting team preparing the ESRB Recommendation on exchange and collection of information for macroprudential purposes on branches of credit institutions having their head office in another Member State or in a third country.
Further work was done on macroprudential instruments for use beyond banking
The ECB continuously supported the ESRB’s work on macroprudential instruments to be used beyond the banking sector. The ECB contributed to the analysis of data and risks, in particular the implications of margining practices for insurers, and to the design of new macroprudential instruments for the insurance sector, focusing on some of the options which were shortlisted in the 2018 report on macroprudential provisions, measures and instruments for insurance. The outcome of this work will directly feed into the ongoing discussions on the review of Solvency II, with the aim to strengthen the regulatory framework for insurers and reinsurers from a macroprudential perspective.
The ECB also contributed to the continued development of risk metrics for non-banks, and to the drafting of the fourth issue of the EU Non-bank Financial Intermediation Risk Monitor, which presents an overview of developments in the sector, with a focus on assessing potential risks to financial stability. In addition to this, the ECB provided valuable contributions to the interim paper on mitigating the procyclicality of margins and haircuts in derivatives markets and securities financing transactions, both in terms of drafting and developing the underlying analytical thinking.
Analytical work on the financial sector implications of climate change was given more prominence
Furthermore, the ECB worked together with the ESRB on developing and implementing methodologies for conducting an impact study of how different climate change scenarios could be affecting the EU financial sector. It also provided a mapping of different methodologies, an assessment of data availability and an overview of the type of financial institution exposures to be analysed when conducting climate-related risk analysis.
The ECB chaired the ESRB Task Force on Stress Testing, which prepared the adverse scenarios for the pension fund stress test of the European Insurance and Occupational Pensions Authority, as well as the money market fund and central counterparty stress tests of the European Securities and Markets Authority. To this end, several Directorates General of the ECB provided critical technical and modelling support to the ESRB task force.
Finally, the ECB actively participated in the ESRB’s European Systemic Cyber Group, which developed an analytical framework for assessing cyber risks.
More detailed information on the ESRB can be found on its website and in its Annual Reports.
3.3 Microprudential activities to ensure the soundness of individual banks
The year 2019 marked five years since the establishment of ECB Banking Supervision. Throughout these years its microprudential activities have contributed to fostering a stable European banking sector and a level playing field for all banks in the euro area. Thanks to the progress made since 2014, European banking supervision is evolving into a mature institution.
Continuity and adaptation of the ECB’s supervisory priorities
Although the post-crisis repair of banks’ balance sheets has greatly advanced, it nonetheless continued to rank highly among the supervisory priorities in 2019. Other priorities focused on the drivers of low profitability for European banks and governance issues, including banks’ conventional risk management capabilities, and emerging risks, particularly regarding the ongoing digitalisation of financial services and their vulnerability to IT and cyber risks.
Supervisory tools and methods continued to be improved
Throughout 2019 ECB Banking Supervision continued to improve its tools and methods. Following up on its previous commitment, the ECB revised, in August 2019, the supervisory expectations for the prudential provisioning of new non-performing exposures (NPEs), specified in the Addendum to the ECB Guidance to banks on non-performing loans, in order to take into account new Pillar 1 requirements. Following a public consultation and the publication of the general topics guide in November 2018, the ECB published, in July 2019, final risk type-specific chapters of the ECB guide to internal models, covering credit risk, market risk and counterparty credit risk. In February 2019 the ECB also published aggregate stress-test results for all participating banks under its supervision, as a complement to the 2018 EU-wide stress test. And, in October 2019, it published the results of its 2019 sensitivity analysis of liquidity risk conducted as the annual stress test. The results of both exercises feed respectively into the 2018 (published in April 2019) and the 2019 Supervisory Review and Evaluation Process.
Preparatory work was done ahead of the United Kingdom’s exit from the EU
While the number of banks directly supervised by the ECB remained broadly stable in 2019, a number of banks have undergone significant changes to their group structures and activities as banking groups consolidate or relocate activities from the United Kingdom to the euro area. For the banks that became significant as a result, the ECB assumed the direct supervision and, for some of those, the obligatory comprehensive assessment was launched in the second half of 2019. In the uncertain period preceding the United Kingdom’s withdrawal from the EU, ECB Banking Supervision focused on monitoring the preparedness of banks and supervisors for all possible contingencies and, in particular, the implementation of banks’ Brexit plans, as agreed between banks and supervisors. While banks made some progress towards their target operating models in 2019, the ECB repeatedly warned against further delays and continued to communicate its supervisory expectations through updates to the FAQs on the ECB Banking Supervision website, several articles in the Supervision Newsletter and bilateral discussions with the supervised entities.
Progress was made towards establishing close cooperation with Bulgaria and Croatia
The year 2019 also witnessed progress towards enlarging the SSM beyond the euro area, after Bulgaria and Croatia requested the establishment of close cooperation between the ECB and their national competent authorities (NCAs). ECB Banking Supervision concluded, in July 2019, its comprehensive assessment of six Bulgarian banks and agreed, in August 2019, to conduct a comprehensive assessment of five Croatian banks, which is required as part of the process of establishing close cooperation with EU Member States whose currency is not the euro. In parallel, the ECB has been working closely with Българска народна банка (Bulgarian National Bank) and Hrvatska narodna banka in view of their potential future role as NCAs within the SSM.
More detailed information on ECB Banking Supervision can be found on its website and in the 2019 ECB Annual Report on supervisory activities.
Financial technology brings significant benefits for banks, their customers, the financial system and the broader economy, but it also entails challenges and risks. Financial institutions are free to innovate in a responsible manner, but the associated risks must be mitigated through effective risk management frameworks and oversight.
The emergence of fintech and specialised fintech firms has led to changes in existing banking business models. In the European Union, fintech firms have so far mostly entered into partnerships with banks, enabling the latter to improve the customer experience by providing a wider range of financial services and products in a more affordable and efficient manner. Moreover, with the increasing availability of data and the use of artificial intelligence as well as enhanced computing power to harness the data, banks are also increasingly using fintech to enhance their own internal operations.
As a result, interlinkages between fintech firms and banks are growing, most notably in the provision of outsourcing services, and operational risks have increased at both the institutional and the system-wide levels. Some fintech firms are also offering new financial services, especially in the area of payments, putting pressure on banks. Importantly, “big tech” firms with their large customer bases and established technology platforms are gradually making inroads into financial services and have already become dominant providers of cloud computing.
The ECB has responded to the evolving challenges and risks arising from financial innovation on multiple fronts. At the macroprudential level, the ECB is monitoring and assessing the financial stability implications of fintech. Profitability pressures stemming from competition with fintech firms are being amplified by banks’ needs for investment in digitalisation, which requires time to yield net benefits. Growing interlinkages with fintech firms could mean that disruptions in these firms might have systemic implications for the financial system unless adequate safeguards are put in place.
The ECB also contributes to fintech-related policy and financial stability work through various European and international fora, including the European Banking Authority, the Financial Stability Board, the Basel Committee on Banking Supervision and the Committee on Payments and Market Infrastructures. In addition, it acts as a driver of change, as can be seen from the launch of TARGET Instant Payment Settlement and the ongoing exploration of the application of new technologies to market infrastructures.
At the microprudential level, ECB Banking Supervision is carrying out further work to develop a common understanding of fintech-related risks and to ensure a consistent supervisory approach to these risks across the SSM. This involves assessing the impact of fintech on banks’ business models and the main associated risks. In order to enhance its supervisory approach to fintech, ECB Banking Supervision is engaging with SSM banks to learn how they are using innovative technologies and solutions and what the implications are for their business models, and more importantly how the main risks could be addressed by risk management frameworks.
On 21-22 May the first ECB Fintech Industry Dialogue took place, bringing together euro area bankers and supervisors, third-country supervisors, as well as representatives from regulatory authorities such as the European Commission, the European Banking Authority and the European Securities and Markets Authority. The dialogue focused on: (i) credit scoring using artificial intelligence and big data; (ii) automated online investment advice (“robo-advice”); and (iii) cloud computing. The event was intended to be the first of several such dialogues where banks have the opportunity to provide supervisors with their views on the recommended areas of supervisory focus. This input contributes to further developing the approach to the supervision of banks using innovative technologies.
ECB Banking Supervision also continued to develop its international cooperation on fintech-related matters both within and outside the SSM. For example, knowledge-sharing initiatives were set up to facilitate swift access to relevant fintech information for supervisors across the national competent authorities and at the ECB.
3.4 The ECB’s contribution to European policy initiatives
The framework set up following the global financial crisis can still be enhanced
Five years ago the first pillar of the banking union, the Single Supervisory Mechanism, began operations following the ambitious set of institutional and regulatory initiatives taken in the aftermath of the global financial crisis. With this concrete step, EU Member States and institutions fostered financial integration and stability and strengthened economic resilience.
Today, however, there is still scope to further integrate the single banking market. This would contribute to the uniform transmission of monetary policy and further remove the destabilising relationship between banks and sovereigns, which was at the heart of the euro area sovereign debt crisis. Further progress on developing and integrating capital markets is also needed to enhance the ability of the financial system to diversify risks and to complement the banking union. In addition, risks in the non-bank financial sector should be mitigated through appropriate macroprudential tools.
Completing the banking union
In-depth work to complete the banking union was carried out in 2019
In 2019 the ECB was fully involved in the work in EU fora to strengthen the banking union. In June 2019 the Euro Summit acknowledged in its declaration the progress made on deepening Economic and Monetary Union and supported the continuation of technical work on strengthening the banking union. In the second half of 2019 the High-Level Working Group on a European Deposit Insurance Scheme (EDIS) carried out further work on the short and long-term perspectives regarding the establishment of an EDIS, the options for the regulatory treatment of sovereign exposures, as well as how to strengthen financial stability, enhance crisis management and foster integration. Furthermore, the Eurogroup decided to continue its efforts to finalise the package on the revision of the European Stability Mechanism Treaty, also in view of the need to provide a common backstop to the Single Resolution Fund.
The ECB contributed extensively to the technical discussions in EU fora by providing input to the different work streams. Regarding the crisis management framework, the ECB insisted on addressing the existing overlaps in regulation on early intervention measures. The ECB also supported further analysis of the impediments to cross-border integration, notably the barriers to the free flow of capital and liquidity within the banking union. More generally, the ECB advocated a compromise package that would include a first stage of EDIS in the form of liquidity support, while providing an end-stage perspective in the form of full loss coverage. Such an encompassing agreement would allow Europeans to reap the full benefits of the banking union, including market integration and an equal protection of depositors. The pooling of resources for deposit insurance at the European level would better preserve the confidence of depositors than national schemes; the latter could be more exposed in the event of an idiosyncratic shock, which could potentially weaken their credibility and hence depositor trust.
In line with the concept that risk sharing and risk reduction are two mutually reinforcing processes, the ECB contributed to the further reduction of risks in the banking sector. In particular, ECB Banking Supervision continued its work on banks’ balance sheet repair with the follow-up to its non-performing loans guidance and assessed the quality of banks’ underwriting criteria with a focus on new lending. In 2019 the ECB continued to contribute to the joint monitoring reports on risk reduction (see the May edition and the November edition), prepared together with the European Commission and the Single Resolution Board, which showed further progress in risk reduction.
The second pillar of the banking union was also a major focus of the year. In December 2018 it was agreed that the European Stability Mechanism would provide the common backstop to the Single Resolution Fund. However, the resolution framework continues to have a major gap because a euro area framework for the provision of liquidity to viable banks coming out of resolution is yet to be created. While other major jurisdictions have such a framework in place, largely based on government guarantees to the central bank as liquidity provider, it has so far not been possible to agree on an equivalent solution in the euro area.
Advancing the capital markets union
CMU can facilitate the transmission of monetary policy
In 2019 the ECB continued to advocate the completion of the capital markets union (CMU). A genuine capital markets union, if effectively realised, would significantly deepen financial integration and strengthen Economic and Monetary Union, as well as foster the international role of the euro. This would support a smoother and more homogeneous transmission of monetary policy.
Deeply integrated capital markets would further increase the resilience of the financial system by reducing the reliance on banks and encouraging alternative market-based sources of finance. As underlined in the ECB’s Financial Stability Review in 2019, completing the capital markets union is a fundamental prerequisite to enhance risk sharing and improve the resilience of the euro area to economic shocks. Geopolitical and economic developments since 2015, such as Brexit as well as digitalisation and climate change, have strengthened the need for integrated European capital markets.
With the conclusion of the European Commission’s 2015 CMU Action Plan, a significant number of legislative and non-legislative proposals in the CMU agenda were finalised by the Commission in the 2014-19 legislative term. While much has been achieved on the legislative front, renewed ambition on some of the key priorities is indispensable to push this project forward.
Further harmonisation efforts are needed to advance CMU
In 2019 the ECB underlined the key priorities to advance the capital markets union in EU fora. This included stressing the importance of further harmonisation of national tax and insolvency regimes, which is essential for well-functioning cross-border capital market transactions, as well as further supervisory convergence towards a single rulebook, in particular for non-banks. In the long term, providing additional supervisory powers to the European Securities and Markets Authority would foster a genuine capital markets union with a consistent implementation of the single rulebook across the European Union.
Macroprudential policy for the non-bank financial sector
Continued growth in the non-bank financial sector raises potential financial stability concerns
While being fully supportive of more market-based financing of the euro area economy, the ECB remains concerned about the rapid growth of the non-bank financial sector and its potential implications for financial stability. While a greater role for non-bank financial intermediation in financing the economy is part of the CMU agenda, it continues to be crucial to effectively monitor this sector.
Given these developments, ensuring a sound prudential framework for non-bank financial institutions is indispensable to adequately address the systemic risks that could materialise in this sector. Thus, in 2019, the ECB continued to advocate an extension of the macroprudential framework beyond the banking system and contributed extensively to the related technical discussions in EU and international fora.
4 Smooth functioning of market infrastructure and payments
One of the basic tasks of the Eurosystem is to ensure the smooth operation of payment systems. This task is closely interlinked with the Eurosystem’s responsibilities in the fields of monetary policy and financial stability. The Eurosystem plays a central role in developing, operating and overseeing market infrastructures and arrangements that facilitate the safe and efficient flow of payments, securities and collateral across the euro area.
4.1 TARGET Services
Currently, the Eurosystem’s TARGET Services consist of three components: TARGET2, a real-time gross settlement system for euro payment transactions related to the Eurosystem’s monetary policy operations, as well as bank-to-bank and commercial transactions; TARGET2-Securities (T2S), a single platform for Europe-wide securities settlement; and TARGET Instant Payment Settlement (TIPS), which allows payment service providers to offer their customers the instant transfer of funds, around the clock, every day of the year.
More than 1,000 banks use TARGET2 to initiate transactions in euro, either on their own behalf or on behalf of their customers. Taking into account branches and subsidiaries, more than 45,000 banks worldwide can be reached via TARGET2. In 2019 TARGET2 processed on average 344,120 payments per day with an average daily value of €1.7 trillion.
As a systemically important payment system (SIPS), TARGET2 is crucial not only for the stability and efficiency of the financial sector and the euro area economy, but also for the smooth conduct of the single monetary policy of the euro area and for the stability of the single currency. Like other SIPSs, TARGET2 is subject to continuous oversight by the Eurosystem, which follows a risk-based approach including the monitoring of end-point security and cyber resilience.
In 2019 the Eurosystem implemented a new TARGET2 contingency tool. In the event of an outage of TARGET2 (even if this lasts more than one day), it allows the Eurosystem to continue processing transactions categorised as “critical” and “very critical”. The new contingency tool is part of a broader strategy for strengthening the operational and cyber resilience of the Eurosystem’s market infrastructure.
TARGET2 to be replaced with a new real-time gross settlement system in 2021
TARGET2 has been running smoothly for over a decade. However, as the payments ecosystem has changed significantly during that time owing to technological developments, new regulatory requirements and changing user demands, the Eurosystem is planning to replace TARGET2 with a new real-time gross settlement (RTGS) system in November 2021, and at the same time to optimise liquidity management across all TARGET Services. The new RTGS system will use the messaging standard ISO 20022 and will be able to facilitate payments in multiple currencies. At the end of 2019, based on feedback received in a public consultation, an enhanced version of the User Detailed Functional Specifications for the future RTGS service was published. Furthermore, two network service providers signed contracts with the Eurosystem to offer users network-agnostic connectivity to all Eurosystem market infrastructure services via the new Eurosystem Single Market Infrastructure Gateway (ESMIG).
With regard to T2S, it is now over two years since the migration waves of central securities depositories (CSDs) to the common platform were completed. T2S is currently used by 21 CSDs, serving 20 markets across Europe. In 2019, T2S processed an average of 606,938 transactions per day with an average daily value of €1,106.13 billion.
In 2019 for the first time, an independent external examiner appointed by the ECB Governing Council performed technical and operational examinations of T2S services. The observations made by the examiner were shared with the Eurosystem and the CSDs and non-euro area central banks that use T2S. These examinations will now be performed every year.
Furthermore, following a pre-assessment in 2015, the first comprehensive oversight assessment of T2S in operation, initiated in 2018, was finalised in 2019. It concluded that T2S is largely compliant with the CPMI-IOSCO Principles for financial market infrastructures, indicating that T2S is safe and efficient. While shortcomings in certain areas were identified during the assessment, none were deemed to pose a serious risk if not promptly addressed.
Following the launch of TIPS in November 2018, in its first year seven euro area markets connected to the service, meaning that more than 1,000 payment service providers are now reachable via TIPS. More euro area markets are preparing to join TIPS in 2020. Since TIPS can support different currencies, Sveriges Riksbank expressed its intention to incorporate the Swedish krona into TIPS in 2022.
Furthermore, the Eurosystem is developing a new TARGET Services component, namely the Eurosystem Collateral Management System (ECMS). This single system will be capable of managing the assets used as collateral in all Eurosystem credit operations. In 2019 and on schedule, the project reached the end of its specification phase. Its go-live date is planned for November 2022.
4.2 Innovation and integration in market infrastructure and payments
The financial industry is undergoing considerable transformation driven by innovation and digitalisation. In the retail payments market, for example, new EU legislation allowing third-party access to payment accounts, the launch of instant payments and technical innovations in general have led to the emergence of new market players, new channels for accessing payment services and new ways of initiating payments. (See Box 5 for information on crypto-assets, stablecoins and central bank digital currency.) The challenge for the Eurosystem with respect to these developments is twofold: it must foster integration and innovation in its role as a catalyst and promote the safety and efficiency of market infrastructure and payments in its role as overseer.
Crypto-assets, stablecoins and central bank digital currency
Over the last few years, there has been a lot of hype surrounding bitcoin and other crypto-assets and their potential to be a substitute for money. Crypto-assets allow individuals and businesses to conduct transactions directly with each other without the need for a trusted third party. However, the fact that these assets have been referred to as “crypto-currencies”, “digital currencies” and “virtual currencies” might have given rise to some false expectations regarding their features and functionalities. In broad terms, crypto-assets are assets recorded in digital form that are considered valuable by their users as an investment and/or means of exchange but that are neither a financial claim on, nor a financial liability of, any natural or legal person.
The major disadvantage of crypto-assets is their price volatility. The volatility of crypto-assets has in recent years been higher than the volatility observed, for example, in various commodities markets. This shows the extent to which crypto-asset investors are subject to market risk. Furthermore, this high volatility means that crypto-assets cannot properly perform the three functions of money: a store of value, a means of payment and a unit of account.
In an attempt to circumvent the problem of high price volatility, financial service providers and technology companies have launched a new class of crypto-assets, known as stablecoins, that use stabilisation mechanisms to minimise price fluctuations. Depending on the stabilisation mechanism used, the value of the stablecoin may be backed by: (i) holdings of money (in one currency or a basket of different currencies); (ii) securities and commodities such as gold; (iii) crypto-assets; or (iv) a mechanism attempting to match demand and supply (i.e. algorithmic stablecoins). In 2019 particular attention was paid to stablecoin initiatives, such as Libra, that claim to enable faster transactions at potentially lower costs on a global scale by providing a new separate payment arrangement. However, stablecoins have not yet been tested on a large scale and pose a number of legal, regulatory and oversight risks. Before stablecoin initiatives go live these issues must be addressed through appropriate system design and governance, and risk-proportionate oversight requirements and regulation.
Crypto-assets and stablecoins have sparked a broader debate on payments innovation and on the roles of the private and public sectors in devising new ways to make payments more affordable, efficient and inclusive. The issuance of a central bank digital currency (CBDC) could potentially address the social demand for new innovative, efficient and resilient tools for making payments. But various design features of CBDC could have far-reaching implications for the financial system that need to be carefully assessed. With regard to the retail payments ecosystem, the CBDC design should neither exclude possible collaboration with the private sector nor crowd out private market-led solutions for fast and efficient retail payments in the euro area.
In 2019 the ECB published a report entitled SEPA Migration Impact Assessment, which showed that the development of the Single Euro Payments Area (SEPA) and the migration to pan-European payment schemes for credit transfers and direct debits have brought significant progress towards a safe, efficient and integrated European payments market. However, a SEPA for cards has not been achieved. Furthermore, end-user solutions for payment initiation remain fragmented across Europe. Similarly, for point-of-interaction payments (i.e. point-of-sale and e-commerce payments), a pan-European solution addressing the needs of European users has not yet emerged.
New retail payments strategy, payment instruments oversight framework and collateral management standards
To address this issue, in 2019 the Eurosystem adopted a new retail payments strategy. The strategy supports the development of a market-led pan-European solution for point-of-interaction payments and sets out the key objectives for such a solution.
In the area of oversight, and based on the approach whereby entities performing the same functions should be subject to the same oversight expectations (“same risk, same requirements”), the Eurosystem has taken steps to review its oversight policy and to start developing a new framework for the oversight of payment instruments, schemes and arrangements (PISA oversight framework). This new holistic, agile and future-oriented framework is designed to apply to both established and new payment products, providers and technologies, and to contribute to the safety and efficiency of the overall payment system.
The Eurosystem is fostering market-wide harmonisation in the post-trade area to support the further integration of financial markets in Europe. In the area of collateral management harmonisation, the key objective is to work towards the establishment of a single collateral management rulebook for Europe, comprising standards for collateral management. In 2019, a first set of such standards was adopted by the ECB’s Advisory Group on Market Infrastructures for Securities and Collateral, covering triparty collateral management, corporate actions for debt instruments, and billing processes; these should be implemented by November 2022. National Stakeholder Groups have been asked to prepare their respective adaptation plans with a view to complying with the standards.
The Eurosystem has also continued to foster post-trade harmonisation in the field of securities settlement, in particular by closely monitoring progress in implementing standards and following up on any gaps in progress. At the end of 2019, 90% of the markets that participate in T2S complied with the core harmonisation standards (compared with 85% in 2018).
The Eurosystem is involved in the authorisation of all euro area CSDs
In the area of securities infrastructures, the Eurosystem, as the central bank of issue for the euro, participates in the authorisation and regular review and monitoring of CSDs under the CSD Regulation. In fact, the Eurosystem is the only authority currently involved in the authorisation and review of all euro area CSDs and as such is helping to facilitate a consistent approach to these tasks, thereby playing a key role in guarding the safety and efficiency of securities settlement.
With regard to central counterparties (CCPs), the Eurosystem as the central bank of issue for the euro has continued to contribute to the activities of supervisory colleges established under the European Market Infrastructure Regulation (EMIR), including to the assessment of CCPs’ requests to extend their services or to introduce changes to their risk models. Furthermore, the Eurosystem is represented in crisis management groups established or being set up globally for CCPs that are systemically important in more than one jurisdiction.
In 2019 the Eurosystem engaged in discussions relating to the revision of the EMIR framework, the purpose of which is to enhance the regulatory framework for CCPs, in particular non-EU CCPs, and which came into effect on 1 January 2020. The Eurosystem also contributed to the preparations for an EU regulation on CCP recovery and resolution and was involved in EU-wide CCP stress tests, in particular related to liquidity risk.
5 Efforts to support market functioning, and financial services provided to other institutions
In October 2019 the ECB began publishing the euro short-term rate (€STR), a new reference interest rate that is based entirely on money market statistical reporting data. The €STR will progressively replace the euro overnight index average (EONIA) and is expected to become one of the main reference rates in euro area markets. The launch of the new reference rate was well anticipated by the financial industry and did not result in any serious disruptions. The daily production of the €STR has worked well and the methodology has proved reliable. In 2019 the ECB continued to be responsible for the administration of various financial operations on behalf of the EU, and continued its overall coordinating role in relation to the Eurosystem Reserve Management Services framework. Furthermore, the ECB decided to start publishing additional data on its foreign exchange interventions as of April 2020, with the aim of enhancing communication and transparency in this field and in line with its accountability practices in other policy areas (see Box 6).
5.1 The €STR, the new overnight reference rate for euro area money markets
On 2 October 2019 the ECB began publishing a new overnight reference interest rate for the euro area markets. The euro short-term rate, or the €STR, reflects the wholesale euro unsecured borrowing costs of euro area banks. This robust and reliable rate, computed daily based currently on more than €30 billion worth of eligible transactions reported by 50 different reporting agents, should progressively replace EONIA.
The methodology of the €STR is designed to comprehensively reflect the underlying money market dynamics. The rate is informed by a broad set of eligible transactions reported by banks which were conducted with other banks as well as with non-bank financial institutions; this makes it resilient to structural changes in the unsecured market. In 2019 the average daily volume of transactions underlying the €STR calculation stood at €31.1 billion. The €STR’s data sufficiency policy ensures that the rate is representative by requiring that: (a) at least 20 of the institutions currently reporting under the Money Market Statistical Reporting (MMSR) Regulation submit contributions; and (b) the five banks reporting the largest share of the volume do not account for more than 75% of a given day’s turnover. If one of these requirements is not met, a short-term contingency procedure is triggered, thus ensuring the availability of the rate. Finally, the rate is computed as a volume-weighted trimmed average, whereby the top and bottom 25% of the volume, corresponding to the transactions with the lowest and highest rates, are filtered out to compute the rate, which helps to reduce the influence of outliers (for further details on how the €STR is determined see Box 7 in Chapter 7).
The €STR, a robust and reliable rate based on a broad set of eligible transactions, will replace EONIA
The €STR is progressively replacing EONIA, which will be discontinued on 3 January 2022. Following the recommendations of the private sector working group on euro risk-free rates and a public consultation, on 2 October 2019 the administrator of EONIA – the European Money Markets Institute – changed the EONIA methodology so that, until its discontinuation on 3 January 2022, the rate is determined as the €STR plus a fixed spread of 8.5 basis points. The working group on euro risk-free rates, which was established in 2017 to identify and recommend risk-free rates that could serve as a basis for an alternative to existing benchmarks, produced guidance for the transition from EONIA to the €STR. This includes recommendations on how to approach EONIA-linked contracts, as well as analyses of the implications of the change for products, processes and models, for financial accounting and for risk management.
The ECB’s efforts to communicate with benchmark users in preparation for the €STR launch together with the guidance and recommendations of the working group on euro risk-free rates contributed to the smooth start of the €STR. The launch of the new reference rate and the change to the EONIA methodology were well anticipated by the financial industry and did not result in any serious disruptions. For example, internal systems were adjusted to take into account the different timing for publishing the reference rate, i.e. in the morning of the day following the trade date. Moreover, the first market transactions indexed to the €STR, including the first issuances of securities, were successfully completed. In the derivatives market, the first over-the-counter swap transactions were executed with the launch of the rate, while some of the central clearing counterparties started offering clearing of €STR-based products shortly afterwards in October and November.
The daily production of the €STR has worked well and the methodology has proved reliable
The daily production of the €STR has worked well and the methodology has proved reliable. The reliability of the methodology can be illustrated by two examples. First, the ECB’s deposit facility rate cut on 18 September 2019 was fully and immediately reflected in pre-€STR data and, since the start of the €STR publication, the rate and distribution of the underlying transactions in the middle range have remained fairly stable. Second, the bank holiday in Germany on 3 October 2019 had a negligible impact on the rate and its various metrics. While the value of the reported transactions declined by €4.3 billion on that day compared with the day before, the number of participating banks as well as the concentration of the turnover reported by the five banks with the largest share of the volume remained at a comfortable distance from the thresholds that define the data sufficiency policy as explained above. Furthermore, the volatility of the €STR remained contained, illustrating the robustness of the methodology in the face of such events.
The €STR since 9 September 2019
€STR data sufficiency metrics since 9 September 2019
More effort on the part of market participants is required to build sufficiently liquid €STR cash and derivatives markets
While the use of the €STR is gaining momentum, more effort on the part of market participants is required to build sufficiently liquid €STR cash and derivatives markets. The use of the €STR should be broad-based across market segments – that is, it should not only be seen as the replacement for EONIA in the derivatives market, but also be used in cases in which other benchmark rates would normally be used. Examples of such use on both sides of the balance sheet include bond issuances and the origination of loans.
The €STR could function as a fallback in EURIBOR-linked contracts and as an alternative rate to EURIBOR
The €STR also offers a way to address risks related to the “interbank offered rates”, or “IBORs”, in the context of the global reform of these indices. As recommended by the Financial Stability Board, the use of overnight near-risk-free rates should be encouraged across global interest rate markets where appropriate, and contracts referencing IBORs should have robust fallback provisions. In the euro area, the authorisation of EURIBOR’s administrator on 3 July 2019 allowed for the continued use of the benchmark; furthermore, unlike LIBOR, EURIBOR is not scheduled to be discontinued. Nevertheless, the long-term sustainability of EURIBOR cannot be taken for granted: first, it depends on the stability of the panel of contributing banks, and second, it depends on the evolution of the money market activity that EURIBOR aims to measure. While competent authorities under the EU Benchmarks Regulation can provide a temporary backstop in the form of mandatory contributions to the benchmark or mandatory administration of the benchmark, this backstop is limited in nature and time. Therefore, the €STR – and term structures based on the €STR – could function as a fallback in EURIBOR-linked contracts and also as an alternative rate to EURIBOR. There are already good examples in other jurisdictions such as the United States, the United Kingdom and Switzerland of the use of overnight rates similar to the €STR gaining traction and being well promoted as a way to address uncertainties related to LIBOR.
5.2 Administration of EU borrowing and lending operations
The ECB is responsible for the administration of the borrowing and lending operations of the EU under the medium-term financial assistance (MTFA) facility and the European Financial Stabilisation Mechanism (EFSM). In 2019 the ECB processed interest payments in relation to the loans under the MTFA. As at 31 December 2019 the total outstanding amount under this facility was €200 million. In 2019 the ECB also processed various payments and interest payments in relation to the loans under the EFSM. As at 31 December 2019 the total outstanding amount under this mechanism was €46.8 billion.
The ECB processes payments for various EU loan programmes
Similarly, the ECB is responsible for the administration of payments arising in connection with operations under the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). In 2019 the ECB processed various interest and fee payments in relation to two loans under the EFSF. The ECB also processed payments in relation to subscriptions by ESM members to the ESM’s authorised capital stock.
Finally, the ECB is responsible for processing all payments in relation to the loan facility agreement for Greece. As at 31 December 2019 the total outstanding amount under this agreement was €52.9 billion.
5.3 Eurosystem Reserve Management Services
A number of Eurosystem central banks provide services under the ERMS framework
In 2019 a comprehensive set of financial services continued to be offered within the Eurosystem Reserve Management Services (ERMS) framework established in 2005 for the management of customers’ euro-denominated reserve assets. A number of Eurosystem national central banks (the Eurosystem service providers) offer the complete set of investment services, under harmonised terms and conditions and in line with market standards, to central banks, monetary authorities and government agencies located outside the euro area, and to international organisations. The ECB performs an overall coordinating role, monitors the smooth functioning of the services, promotes changes to improve the framework and prepares related reports for the ECB Governing Council.
In 2019 one additional central bank started offering ERMS services, bringing the total number of Eurosystem service providers to ten. The number of customer accounts in the ERMS was 273 at the end of 2019, compared with 277 at the end of 2018. The total aggregated holdings (including cash assets and securities holdings) managed within the ERMS framework decreased by approximately 7.5% in 2019 compared with 2018.
ECB enhances reporting on foreign exchange interventions
On 26 September 2019 the Governing Council of the ECB decided to publish additional data on the ECB’s foreign exchange interventions (FXIs) as of April 2020. The aim of this new publication is to enhance communication and transparency in this domain in line with the accountability practices in other policy areas while safeguarding the ECB’s ability to carry out interventions in the foreign exchange market in an effective manner. In the case of the asset purchase programme, as an example of accountability practices, the Eurosystem provides regular data on the volume and the distribution of purchases across programmes and jurisdictions.
The exchange rate is not a policy target for the ECB. Since the inception of the euro, the ECB has intervened in the foreign exchange market twice – in 2000 and 2011 (see Table A). The ECB intervened first in 2000 owing to concerns about the global and domestic repercussions of the exchange rate of the euro, including its impact on price stability. Initially the ECB and the US and Japanese authorities intervened in a coordinated manner on 22 September, and then the ECB intervened unilaterally in November. Second, at the request of the Japanese authorities, the ECB and the US, UK and Canadian authorities intervened in a coordinated manner on 18 March 2011 in response to movements in the exchange rate of the yen associated with the tragic events in Japan.
ECB foreign exchange interventions to date
With the change in the publication policy, the ECB will provide data on FXIs using a structured and systematic approach in terms of frequency and data coverage. The ECB has previously used several channels to disclose FXI information, including its weekly financial statements, Annual Accounts and Annual Report. Going forward, the ECB will publish FXI data in a table on its website and in the ECB’s Annual Report. The table on the website will be updated quarterly, with a delay of one quarter. With the first publication, the table will disclose all FXI historical data since 1999. The ECB’s Annual Report will from now on also provide additional background information and summarise any new developments in FXIs, as appropriate. In addition, the ECB Annual Accounts will state whether or not any FXIs were carried out during the year under review. The commentary on the weekly financial statement will also contain a general reference to any intervention occurring the week before, as in previous occurrences in 2000 and 2011.
The new reporting framework will cover FXIs carried out by the ECB unilaterally and in coordination with other authorities, as well as exchange rate mechanism (ERM II) FX interventions “at the margins”. It will encompass the total amount (net and gross), the direction (sale or purchase), the breakdown per currency and the date(s) of intervention. In the interests of full transparency, the absence of any FXIs will also be explicitly stated in the quarterly table.
This step brings the ECB’s communication policy on FXIs into line with the accountability practices it has developed in other areas over the years. These practices go beyond what is strictly required by the Treaty on the Functioning of the European Union. In this way the ECB is providing relevant information on its strategy, assessments and policy decisions to the broader public and the financial markets. This helps the ECB foster credibility by being transparent about how it performs its tasks. Each ERM II member central bank remains responsible for disclosing FXI data according to its own practice.
6 More banknotes and low level of counterfeiting
The ECB and the euro area national central banks (NCBs) are responsible for issuing euro banknotes within the euro area, for guaranteeing the availability of cash and for maintaining confidence in the currency. The number and value of euro banknotes in circulation have been rising since their introduction in 2002, and generally at a faster pace than economic growth. In 2019 the number of counterfeits remained at a low level, owing to a combination of factors, including enhanced security features in the new Europa series, continuous cooperation with law enforcement, regular communication with the public and training offered to professional cash handlers. In May 2019 the new €100 and €200 banknotes were introduced with new, innovative security features, completing the Europa series of banknotes.
6.1 Banknote circulation continued to increase
In 2019 the number and value of euro banknotes in circulation grew by around 6.4% and 5.0% respectively. At the end of the year there were 24.1 billion euro banknotes in circulation, with a total value of €1,293 billion (see Charts 25 and 26). The €50 banknote accounted for nearly half of both the number and value of banknotes in circulation. The €200 banknote had by far the highest annual growth rate, reaching 61.4% in 2019, as it fulfilled part of the demand for the €500 banknote, the issuance of which was stopped. The total value of €100 banknotes in circulation at the end of 2019 stood at €305 billion, which is equal to the combined value of all euro banknote denominations in circulation in July 2002. Growth in the €100 and €50 banknotes remained high, at 8.8% and 7.4% respectively.
Number and value of euro banknotes in circulation
Value of euro banknotes in circulation by denomination
In terms of value, one-third of euro banknotes are held outside the euro area
It is estimated that, in terms of value, around one-third of the euro banknotes in circulation are held outside the euro area. These notes are predominantly held in neighbouring countries and are mainly the higher denominations. They are used as a store of value and for settling transactions in international markets.
The production of euro banknotes is shared among euro area NCBs, which were altogether allocated the production of around 3.7 billion banknotes in 2019.
The total number of euro coins in circulation increased by 3.3% in 2019, to 135.1 billion at the end of the year. The value of coins in circulation rose to €30 billion, 3.4% higher than at the end of 2018.
In 2019 euro area NCBs checked the authenticity and condition of some 30 billion banknotes, withdrawing around 5 billion from circulation as unfit. The Eurosystem also continued its efforts to help banknote equipment manufacturers to ensure that their machines meet the ECB’s standards for checking euro banknotes for authenticity and condition prior to recirculation. In 2019 credit institutions and other professional cash handlers checked some 38 billion euro banknotes for authenticity and condition.
Introduction of the new €100 and €200 banknotes and stopping issuance of the €500
On 28 May 2019 the new €100 and €200 banknotes entered into circulation. The introduction of the new notes completed the Europa series, which was launched in 2013 with the €5 banknote.
The issuance of the €500 banknote was stopped between January and April 2019 by all euro area NCBs. As is the case for the other denominations of the first series of euro banknotes, the €500 banknotes will remain legal tender and can therefore continue to be used as a means of payment and store of value. Banknotes of the first series (including the €500) will always retain their value, as they can be exchanged for an unlimited period of time at the euro area NCBs.
6.2 Euro banknote counterfeiting remained low in 2019
The number of counterfeit euro banknotes remained low in 2019, with around 559,000 counterfeits being withdrawn from circulation. This low number is the result of a combination of factors, including enhanced security features in the new Europa series, cooperation with law enforcement, and communication and training efforts at European and national level. Compared with the number of genuine euro banknotes in circulation, the proportion of counterfeits further decreased and is very low. Long-term developments in the number of counterfeits removed from circulation are shown in Chart 27.
Number of counterfeit banknotes per million genuine euro banknotes in circulation
Counterfeiters mainly produce counterfeit €20 and €50 banknotes, which together accounted for more than 70% of the total number of counterfeits withdrawn from circulation in 2019. The share of counterfeit €50 banknotes declined in 2019.
The ECB advises the public to remain vigilant when receiving banknotes and remember the “feel-look-tilt” test
In spite of a decline in the deceptiveness of counterfeits withdrawn from circulation, the ECB continues to advise the public to remain vigilant when receiving banknotes, to remember the “feel-look-tilt” test, and not to rely on just one security feature. In addition, training is offered to professional cash handlers on a continuous basis, both in Europe and beyond, and up-to-date information material is made available to the public to support the Eurosystem’s fight against counterfeiting. The ECB also cooperates with Europol, Interpol and the European Commission in pursuit of this goal.
6.3 Pursuing greener banknotes
In 2004 the Eurosystem conducted a life cycle assessment of euro banknotes based on the ISO 14040 series of standards, pioneering in assessing the environmental impact of banknotes over their whole life cycle. This complex assessment has been the main source of information for implementing measures to reduce the environmental impact of euro banknotes. For instance, the Eurosystem has put in place an accreditation system for manufacturers of euro banknotes and their components which includes an environmental management system and has focused, among other things, on moving gradually towards the target of 100% use of sustainable cotton fibres in euro banknote paper.
The Eurosystem has also been monitoring on an annual basis key consumption and emissions data from all accredited manufacturers, seeking to improve the environmental performance of the production process.
The ECB – assisted by the national central banks (NCBs) – develops, collects, compiles and disseminates a wide range of statistics and data which are needed to support the monetary policy of the euro area, financial stability and various other tasks of the European System of Central Banks (ESCB) and the tasks of the European Systemic Risk Board (ESRB). These statistics are also used by public authorities, financial market participants, the media and the general public, contributing to the fulfilment of the ECB’s transparency objective.
This chapter focuses on how to contain the reporting burden for banks and on statistics relating to fintech, including crypto-assets. Two boxes focus respectively on the independent determination process for the euro short-term rate (€STR) based on the relevant Guideline (Box 7) and on the medium-term strategy for financial accounts statistics, setting out objectives for the coming years (Box 8).
7.1 Containing the reporting burden
The financial crisis led to a heavier reporting burden
The financial crisis revealed the limitations of aggregated statistics in providing the necessary information to serve policymakers in a situation of increased fragmentation across countries, sectors and markets. The ECB responded to these limitations by enacting new legal acts allowing it to obtain additional granular data which meet monetary policy, microprudential and macroprudential data needs, for example statistical datasets like the AnaCredit dataset, securities holdings statistics and money market statistics. This resulted in an increase in the reporting burden for banks.
Another issue that the banking industry is facing is the lack of cross-country harmonisation in reporting schemes, which originates from the ESCB’s traditional approach whereby NCBs can fulfil European statistical requirements through their national reporting frameworks.
While there is a high degree of conceptual harmonisation in statistical reporting across the euro area, in practice, a large number of separate statistical reports are to be submitted to NCBs, with different transmission frequencies and timelines, and different levels of aggregation.
Moreover, the statistical reports partly overlap with a wide range of reports required by banking supervisors. This leads to redundancies and overlaps as well as complex reporting schedules and processes.
Understandably, the banking industry has highlighted this situation and called for a much more cost-efficient design and implementation of reporting requirements while maintaining the effectiveness of regulation and at the same time even further increasing data quality.
The Integrated Reporting Framework consolidates the existing ESCB statistical requirements for banks
Against this background, in 2016 the ESCB began working on consolidating the existing statistical requirements for banks through the development of an Integrated Reporting Framework (IReF), designed to establish an integrated solution for ESCB statistical reporting across countries and statistical domains. Under the new framework, which is expected to be implemented between 2024 and 2027, more granular data will be collected than in the existing datasets, allowing the coverage of the existing requirements in a unique framework and avoiding duplications of the requirements wherever possible. This means that, while the data volume will significantly increase, banks will have fewer statistical classifications and aggregations to perform, which are frequently resource-intensive activities; such tasks will instead be carried out by the ESCB, with an expected overall increase in data quality. The IReF will use a unique data model and dictionary, which are expected to fully standardise definitions and ensure methodological soundness. Granular data are inherently flexible in that they can be combined in different ways to provide new products and services, and it is expected that this may reduce the frequency of changes in the legal reporting framework and, at the same time, decrease the need for ad hoc data requests by the authorities.
The Banks’ Integrated Reporting Dictionary complements the Integrated Reporting Framework
As shown in Figure 2, the ESCB’s overall strategy for collecting data from banks also foresees supporting reporting agents in optimising the organisation of the information stored in their internal operational systems (e.g. for accounting, risk management, securities or deposits) in an “input layer”, which could then provide the basis for fulfilling all applicable reporting requirements based on standardised transformation rules. With this aim, a group composed of representatives of the ECB, some euro area NCBs and the banking industry is developing a Banks’ Integrated Reporting Dictionary (BIRD). The scope of the BIRD goes beyond ESCB statistical datasets to cover supervisory and resolution reporting.
ESCB strategy for collecting data from banks
The ESCB is conducting a cost-benefit analysis of the Integrated Reporting Framework
In 2018 the ESCB decided to launch a cost-benefit analysis of the IReF in close cooperation with the banking industry and other relevant stakeholders, with a view to assessing the impact of the initiative on the supply and demand sides. The first step consisted of a qualitative stock-taking questionnaire on the state of play of statistical reporting across domains and countries in order to identify the main cost factors and potential benefits of the IReF. In 2019 the ESCB Statistics Committee assessed the results of the qualitative stock-taking questionnaire and designed concrete scenarios for the IReF as regards various data collection and statistical production aspects. The next step in 2020 will be to assess, by means of a questionnaire, the costs and benefits of these scenarios. The scenarios were developed by focus groups that involved field experts from the ESCB and, on selected topics, representatives from the banking industry. The new questionnaire will be based on a draft IReF reporting scheme, which will allow respondents to rate scenarios based on concrete proposals for reporting requirements. The ESCB will then assess the results and, if they show support for the IReF, identify the optimal features that would best suit the industry and the ESCB users and compilers.
If the outcome of the overall cost-benefit analysis is satisfactory, the Governing Council of the ECB may decide to proceed with the IReF. A draft ECB regulation would be developed for a public consultation before its adoption and implementation. IReF requirements would be mandatory for all euro area banks.
7.2 New and enhanced euro area statistics
Fintech and crypto-assets
The ECB monitors the crypto-asset phenomenon and fintech
Statistics on technological innovation that is used to support or provide financial services (fintech) are being developed and enhanced, in order to continue meeting statistics users’ needs in a digitally transformed world. In particular, in early 2019 the Directorate General Statistics of the ECB set up an internal crypto-asset dataset and established a set of indicators based in the first instance on publicly available aggregated data. This dataset and set of indicators, after undergoing quality checks and being complemented with other data from commercial sources, provided input into the ECB’s monitoring of the crypto-asset phenomenon. Using big data technologies, it was possible for the ECB to create an automated set of procedures for collecting, handling and integrating several crypto-asset data collections. An important component of this work is the investigation of the statistical classification of crypto-assets. With respect to fintech, while the discussion on fintech statistical definitions as well as related data needs is also taking place in international fora, the ECB has been building an experimental internal dataset on fintech entities in the euro area, in line with similar initiatives implemented at some euro area NCBs. The aim is to gain insights into linkages between the financial sector and fintech, the opportunities the latter unlocks and the risks it poses.
Independent determination process for the euro short-term rate (€STR)
Following two years of intensive preparations by the Eurosystem and reporting banks, the ECB published the euro short-term rate (€STR) for the first time on 2 October 2019 (see Section 5.1). The €STR, which reflects the wholesale euro unsecured overnight borrowing costs of euro area banks, is calculated and published by the ECB’s statistical function, ensuring that the determination of the rate is separate from the ECB policy functions. In line with the €STR Guideline a control framework has been created to protect the integrity and independence of the determination process and to deal with any existing or potential conflicts of interest.
The €STR Guideline establishes the ECB’s responsibility for the administration of the rate, as well as the tasks and responsibilities of the ECB and the NCBs with respect to their contribution to the €STR determination process and other business procedures. Pursuant to the €STR Guideline an internal Oversight Committee was created to review, challenge and report on all aspects of the €STR determination process. Furthermore, the €STR determination process is subject to regular internal and external audits. In order to ensure that the €STR procedures are in line with international best practice, the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks are transposed into the €STR Guideline – where relevant and appropriate.
The ECB published the €STR for the first time on 2 October 2019, reflecting trading activity on 1 October 2019. The €STR is published on the ECB’s website at 08:00 CET on every TARGET2 business day based on transactions conducted and settled on the previous TARGET2 business day. If errors are detected following the publication of the €STR that affect it by more than 2 basis points, the €STR is revised and re-published on the same day at 09:00 CET. The €STR is not revised after that time. Immediately after publication by the ECB, the €STR is made available by commercial data providers via real-time market data feeds. To support the transparency of the benchmark determination process, the ECB periodically publishes summary information on errors larger than 0.1 basis point that are detected after the standard publication and do not meet the re-publication criteria.
The €STR is based entirely on actual transactions in euro that are reported by banks in accordance with the Money Market Statistical Reporting (MMSR) Regulation, as recently amended to enhance the availability of high-quality statistics on the euro money market. The MMSR reporting agents – numbering 50 at the cut-off date for data in this report – submit data either indirectly via the respective NCB (the Deutsche Bundesbank, the Banco de España, the Banque de France or the Banca d’Italia) or directly to the ECB before 07:00 CET (see Figure A). The data then go through a quality assurance process, which includes a set of technical checks, a large number of consistency checks, and a set of targeted data quality checks to identify which transactions, if any, should be excluded from the calculation of the €STR. The process of confirming the transactions takes place between 07:15 and 07:45 CET. During this process the ECB, in cooperation with the NCBs, asks the reporting institutions to verify that the identified transactions are correct.
€STR business process
Medium-term strategy for financial accounts statistics
In 2019 the ESCB’s Statistics Committee finalised the development of a new medium-term strategy for quarterly financial accounts statistics. The aim of this initiative was to plan how to further develop financial accounts statistics taking into account new analytical needs and ongoing improvements in statistical capacity (e.g. the increased granularity of data), and how to meet the challenges posed by globalisation and increased international interdependencies. The design of the medium-term strategy involved thorough examinations of analytical needs, data sources and compilation options, in close cooperation with data users and experts from the different statistical domains, e.g. compilers of balance of payments statistics or MFI balance sheet data.
The strategy sets out five objectives to be addressed in the coming years. First, the challenges globalisation poses for financial accounts statistics, linked to the deepening of international interdependencies and economic integration, will be addressed by an increased alignment of these statistics with balance of payments and international investment position statistics, an increase in the granularity of data on cross-border activities, and a specific statistical focus on multinational enterprises. Second, the need to shed further light on non-bank financial intermediation will be met through a more detailed sectoral breakdown and increased granularity of data on financial instruments. Third, increasing analytical needs related to understanding interconnectedness at the macro level with a focus on investment and financing interdependencies, policy spillover channels and contagion chains will be served by enhancing the “from-who-to-whom” framework, which shows creditor-debtor links, through a more detailed sectoral and/or geographical breakdown. Fourth, the statistical analysis of the household sector will be enhanced by introducing distributional measures for household wealth and indebtedness as well as developing an analysis to identify the indirect exposure of households to the underlying investment of funds in securities, equity and other assets (known as investment funds “look-through”). Fifth, the strategy aims to increase the serviceability of financial accounts data, for instance in terms of timeliness and back-data availability.
The workstreams aiming to achieve these objectives take into account the requirements in the context of the second phase of the G20 Data Gaps Initiative and will exploit ongoing initiatives in supporting statistical fields. The development phase, which began in 2019, is generally scheduled for the next three to five years, and will also involve a review of existing ECB statistical regulations and guidelines where this is relevant for implementing the new financial accounts statistical outputs. In a fast-changing environment, the strategy should be seen from the outset as dynamic and adjustable.
The implementation of the medium-term strategy for financial accounts statistics will be a collective effort to face the various challenges in a coordinated manner and with a clear set of objectives, taking advantage of the opportunities emerging from changes in data availability and statistical capacity, and aiming to keep financial accounts statistics relevant and fit for purpose.
8 Research at the ECB
Economic research makes an important contribution to the analysis of economic developments and of the transmission of policy interventions and thereby underpins the achievement of policy objectives. In the light of the economic environment in 2019, inflation dynamics, household finance, and the interplay between monetary policy, financial stability and the real sectors of the economy remained at the core of the 2019 research priorities.
8.1 Research networks
Three research clusters and various research networks play an important role in coordinating the research efforts within the European System of Central Banks (ESCB) and in maintaining relations with academic researchers. In 2019 the three ESCB research clusters on monetary policy, financial stability and the competitiveness of euro area economies continued to organise workshops on related issues. In addition, a Research and Policy Network on Central Bank Communication, co-led by the ECB, was established within the framework of the Centre for Economic Policy Research (see also Section 11.2).
What is the interplay between monetary and macroprudential policies?
One particular focus of research at the ECB is macroprudential policies and their interaction with monetary policies. In 2019 a taskforce studied the various spillovers between the two kinds of policy, including the effects of monetary policy on financial stability and the impact of macroprudential policy on the real economy. In 2020 the focus will be on the optimal coordination between the two kinds of policy.
What can price-setting microdata tell us about inflation dynamics?
The PRISMA (price-setting microdata analysis) Research Network studies the price-setting behaviour of individual firms and in the retail sector using micro price datasets. Research addresses the relationship between the price setting of individual firms and aggregate inflation dynamics, in particular whether price-setting behaviour is affected by low inflation, the monetary policy stance and the state of the business cycle.
What does household heterogeneity mean for monetary policy transmission?
The Household Finance and Consumption Network (HFCN) has finished its work on the third wave of the Household Finance and Consumption Survey (HFCS), the results of which will be released in 2020. Research has, among other things, studied the implications of household heterogeneity for the transmission of monetary policy, for example its role in policy transmission across the income distribution. The HFCS has also been used as an essential input into micro-simulation models which quantify the effects of stress-testing scenarios on households.
The Competitiveness Research Network (CompNet), a research forum for the study of productivity and competitiveness in EU countries, completed a new wave of data collection to improve the coverage and cross-country comparability of its firm-level dataset of competitiveness indicators. In 2019, the CompNet dataset was, for instance, used in studies on the role of trade and fiscal and labour market policies in the reallocation of capital and labour.
In 2019 the ECB launched a project to collect data on consumer expectations in the euro area via a regular online survey. The survey will be conducted in cooperation with national central banks and will cover expectations on inflation, the labour market, consumption and savings behaviour, and consumer finances. It will enable the ECB to study the role of consumers’ expectations in their economic and financial decisions.
8.2 Conferences and publications
The ECB again organised a number of conferences, among them the Sintra forum on 20 years of EMU
The ECB again organised several high-level research events in 2019. The 2019 ECB Forum on Central Banking in Sintra discussed the lessons of 20 years of European Economic and Monetary Union (EMU), with a focus on the diverse progress of economic convergence and the role of fiscal and monetary policies in macroeconomic stabilisation (see also Box 12 in Chapter 12). The ECB’s fourth Annual Research Conference featured innovative research related to secular stagnation, financial market structures and the role of big data in economics. Other important conferences were related to structural reforms in the euro area, inflation developments, global trade, labour markets, fiscal policy and EMU governance, consumer expectation surveys, gender and career progression, and monetary and macroprudential policies.
The ECB released its research in various publication series
In 2019, 129 papers prepared by ECB staff were published in the ECB’s Working Paper Series. In addition, a number of more policy-oriented or methodological studies were published via the ECB’s Occasional Paper Series, Statistics Paper Series and Discussion Paper Series. Many of the ECB’s research activities also resulted in the publication of papers in scientific journals. Furthermore, research findings were reported to a wider audience, for instance via 12 articles published in the ECB’s Research Bulletin. Boxes 9 and 10 summarise two sets of research findings from 2019.
Market concentration, market power and employment dynamism in the euro area
There is an extensive public debate on whether the market power of firms has become excessive over the last decades. For the United States, studies have documented that firm concentration ratios have increased, with a larger market share accounted for by a few firms. In relation to this, the level of competition has declined, allowing firms to increase the mark-up of prices above their marginal costs, while employment dynamism has weakened.
A recent ECB study examined related developments in the four largest euro area economies (Germany, France, Italy and Spain). It did not find evidence of an increase in the market power of firms since the 1990s in these countries. In fact, while the mark-up of prices over costs has increased to a level of above 20% from close to 15% in the United States since the 1990s, it has declined marginally in the euro area (see Chart A). This is largely the result of developments in manufacturing, possibly driven by the impact of deeper trade and monetary integration in the euro area. Moreover, in apparent contrast to developments in the United States, concentration ratios have remained broadly stable in the euro area in recent years, both at the aggregate and the national level.
Developments in mark-ups in the euro area and the United States
While market power is generally regarded as welfare-reducing (as it results in firms raising prices and producing less), it may also have beneficial effects in innovative sectors, as the prospect of enjoying market power is a major incentive for firms to innovate. Indeed, the study found that in high-tech industries high concentration is associated with higher growth rates of total factor productivity.
Finally, job market dynamism, measured by the rates of job creation and destruction, has weakened substantially over the past two decades in the United States, but has remained stable in the euro area. Still, the labour market in the United States remains substantially more dynamic than the one in the euro area. Overall, there are no signs of major shifts in market power and employment dynamism in the large euro area economies.
Gender balance in career progression at the ECB
The gender gap in labour markets has attracted increasing attention in recent years. A recent ECB working paper explores this gap in central banking, a stereotypical male-dominated occupation. The paper analyses the career progression of men and women at the ECB using confidential anonymised personnel data on professional staff between 2003 and 2017. The analysis focuses on expert staff across four different salary bands in comparable business areas related to economic analysis, thereby achieving a homogeneous pool of staff in terms of human capital and experience.
The study finds that, before 2011, women were less likely to be promoted to a higher salary band than men. The difference largely disappeared after 2011, when the ECB took several measures to support gender balance and issued a public statement supporting diversity. Chart A shows the evolution of the gender gap in the probability of promotion to a higher salary band in the ten years after entry to the F/G salary band (the entry-level salary band for expert staff at the ECB). The gap ten years after entry stood at 36% before 2011, but decreased to 8% thereafter.
Gender promotion gap before and after 2011
Data after 2011 allow for a more detailed exploration of the promotion process. This reveals that, after having applied for promotion, women were actually more likely than men to be promoted. They also performed better in terms of subsequent salary progression, suggesting that the higher probability of being promoted was based on merit, not on positive discrimination.
However, women were less likely to apply for a promotion in the first place. Some evidence indicates that such a gender gap in applications reflects the reluctance of women to apply when they expect the level of competition to be high. For instance, women were less likely to apply in a campaign open to external candidates or when competing with a large number of immediate colleagues with relatively high salary levels. Taken together, these results suggest that institutional efforts to foster gender balance may have to include measures aimed at lowering the barriers to women seeking and applying for promotion opportunities. (See Section 12.1 for information on the ECB’s efforts to promote gender diversity in 2019.)
9 Legal activities and duties
This chapter deals with the jurisdiction of the Court of Justice of the European Union concerning the ECB; reports on ECB opinions and cases of non-compliance with the obligation to consult the ECB on draft legislation falling within its fields of competence; and reports on the ECB’s monitoring of compliance with the prohibition of monetary financing and privileged access.
9.1 Jurisdiction of the Court of Justice of the European Union concerning the ECB
The Court of Justice annulled a decision of the Latvian Anti-Corruption Office in so far as it prohibited Mr Ilmārs Rimšēvičs from performing his duties as Governor of Latvijas Banka
On 26 February 2019 the Court of Justice of the European Union (CJEU) annulled the decision of the Korupcijas novēršanas un apkarošanas birojs (Latvian Anti-Corruption Office) of 19 February 2018 in so far as it prohibited Mr Ilmārs Rimšēvičs from performing his duties as the Governor of Latvijas Banka. The separate actions brought by Mr Rimšēvičs (C-202/18) and the ECB (C-238/18) against that decision were the first cases which the CJEU had heard on the basis of the jurisdiction conferred on it by the second subparagraph of Article 14.2 of the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB). First, the CJEU found that a prohibition, even a temporary one as in this case, of a governor of a national central bank from performing his duties constitutes a relieving from office and that it is therefore for the CJEU to review the lawfulness of that prohibition. Second, the CJEU held that the action referred to in the second subparagraph of Article 14.2 of the Statute of the ESCB had as its purpose the annulment of an act of national law because of the “particular institutional context” in which the ESCB operates. Third, the CJEU concluded that Latvia had not established that the relieving of Mr Rimšēvičs from office was based on the existence of sufficient indications that he had engaged in serious misconduct for the purposes of the second subparagraph of Article 14.2 of the Statute of the ESCB.
The General Court dismissed an action for damages against the ECB relating to an ECB opinion issued in the context of the Greek debt restructuring in 2012
On 23 May 2019 the General Court dismissed the action for damages against the ECB brought by several bondholders (Case T-107/17). The damages claimed related to the haircut affecting certain Greek government bonds in the context of a partial restructuring of Greece’s sovereign debt in 2012. The applicants had argued that the ECB, in its Opinion of 17 February 2012 (CON/2012/12), failed to point to the illegality of the Hellenic Republic’s intended debt restructuring. The ECB Opinion was on the draft Greek law retrofitting collective action clauses into sovereign bonds governed by Greek law. The General Court found that the restructuring did not violate the applicants’ fundamental right to property protected by Article 17 of the Charter of Fundamental Rights. It also rejected all other illegality claims made by the applicants. Accordingly, the General Court concluded that the ECB was not liable for damages for not pointing to the alleged illegality of the Greek law in its Opinion. The judgement has been appealed before the Court of Justice.
The General Court ruled that an assessment by the ECB regarding whether a credit institution is failing or likely to fail is a preparatory act that cannot be challenged before the EU Courts
On 6 May 2019 the General Court in two different cases (T-283/18 Bernis and Others v ECB and T-281/18 ABLV Bank v ECB) ruled that a “failing or likely to fail” assessment adopted in the context of the resolution of a credit institution is a preparatory measure that is not open to independent judicial review. In these cases, actions were brought by a credit institution and its direct and indirect shareholders against an assessment by the ECB concerning whether ABLV Luxembourg was failing or likely to fail within the meaning of Article 18(1) of Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund. The General Court upheld the position of the ECB that such assessment should be considered as a mere factual assessment that has in itself no legal effect and is therefore not challengeable before the EU Courts.
The Court of Justice confirmed the ECB’s exclusive competence for the supervision of all credit institutions within the SSM
On 8 May 2019 the CJEU in case C-450/17 P (Landeskreditbank Baden-Württemberg v ECB) upheld the judgement of the General Court by which the General Court dismissed an action seeking the annulment of a decision of the ECB. In that decision, the ECB had informed the Landeskreditbank that on account of its size it was subject solely to the ECB’s supervision rather than shared supervision under the Single Supervisory Mechanism (SSM), pursuant to Article 6(4) of Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. The Landeskreditbank’s challenge to this decision was dismissed by the General Court. The CJEU confirmed that the ECB is exclusively competent for the supervision of all credit institutions on the basis of Article 4 of Regulation No 1024/2013. The national competent authorities assist the ECB in carrying out the tasks conferred on it by Regulation No 1024/2013, through a decentralised implementation of some of those tasks in relation to less significant credit institutions, within the meaning of the first subparagraph of Article 6(4) of that Regulation.
The Court of Justice partially reversed the ruling from the General Court whereby shareholders of a credit institution were granted standing to challenge a decision of the ECB to withdraw the banking licence of that credit institution
On 5 November 2019 the CJEU partially reversed the ruling from the General Court whereby shareholders of a credit institution were granted standing before the EU Courts to challenge an ECB decision to withdraw the banking licence of that credit institution (joined cases C-663/17 P, C-665/17 P and C-669/17 P, Trasta Komercbanka and Others v ECB). Following an appeal from the ECB, the CJEU had to rule for the first time on the admissibility of an action for annulment brought by shareholders of a credit institution against an ECB supervisory decision addressed to the credit institution in which they hold shares. The CJEU ruled that the decision did not directly concern the shareholders for the purposes of the fourth paragraph of Article 263 of the Treaty on the Functioning of the European Union and, consequently, the action brought on their behalf was declared inadmissible. The CJEU also ruled that the action brought on behalf of Trasta Komercbanka by the legal representative of the former management should be considered admissible to comply with the right to an effective judicial protection as provided by Article 47 of the Charter of Fundamental Rights.
9.2 ECB opinions and cases of non-compliance
Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union require that the ECB be consulted on any proposed EU or draft national legislation falling within its fields of competence. All ECB opinions are published on the ECB’s website. ECB opinions on proposed EU legislation are also published in the Official Journal of the European Union.
In 2019 the ECB adopted six opinions on proposed Union acts and 40 opinions on draft national legislation falling within its fields of competence.
Clear and important cases of non-consultation
Eight cases of non-compliance with the obligation to consult the ECB on draft national legislation were recorded, with seven cases being considered clear and important. The ECB was not consulted by: (i) the Bulgarian authorities on a law amending the Law on credit institutions in relation to the supervisory powers of Българска народна банка (Bulgarian National Bank) and its powers to impose administrative penalties; (ii) the Italian authorities on a decree law on urgent fiscal matters and other urgent needs; (iii) the Lithuanian authorities on a law on corporate income tax for financial market participants; (iv) the Portuguese authorities on a law amending the bank secrecy rules in the context of parliamentary enquiry committees and determining the disclosure of operations involving the use of public funds in credit institutions, and on a law reforming and extending the State’s Organisation and Information System (SOIS); (v) the Romanian authorities on a law amending the Statute of Banca Naţională a României with respect to the holding of gold reserves managed by Banca Naţională a României; and (vi) the Swedish authorities on a law on the obligations of certain credit institutions and branches to provide cash services. No case of non-compliance with the consultation obligation in respect of proposed Union legal acts was identified.
The ECB adopted opinions on proposed EU and national legislation
The ECB adopted opinions on EU proposals concerning a governance framework for the budgetary instrument for convergence and competitiveness for the euro area, the conclusion of the Agreement on the withdrawal of the United Kingdom from the European Union, and the appointment of a new ECB President and new members of the ECB Executive Board.
The ECB adopted opinions on draft national legislation concerning national central banks (NCBs), including: reforms of the governance structures of the Nationale Bank van België/Banque Nationale de Belgique, the Central Bank of Cyprus, the Banca d’Italia, Latvijas Banka and the Banco de Portugal; the participation of Българска народна банка (Bulgarian National Bank) in the Single Resolution Mechanism; the financial independence of the Central Bank of Cyprus; lobbying requirements applicable to Česká národní banka; the ownership of Italy’s gold reserves; the role of the Banque centrale du Luxembourg in the protection of the euro against counterfeiting and the authentication of euro coins; the Central Bank of Malta’s oversight of payment services; freedom of information requirements applicable to De Nederlandsche Bank; the remuneration of executives and senior management of Narodowy Bank Polski; audit requirements applicable to the Banco de Portugal; the liability of Banka Slovenije for extraordinary measures regarding bank write-downs; and the conferral of new tasks on NCBs regarding the supervision of micro-credit lenders (the Bank of Greece), credit reference agencies (the Central Bank of Malta) and credit institutions’ compliance with requirements relating to the restructuring of Swiss franc-denominated loans (Banka Slovenije).
The ECB adopted opinions on draft national legislation concerning prudential and financial supervisory matters, including: the establishment of close cooperation arrangements between the ECB and Hrvatska narodna banka within the framework of the Single Supervisory Mechanism; reforms of the institutional framework for banking and financial supervision in Austria, Latvia and Portugal; reforms of the institutional framework for macroprudential supervision in Portugal and Spain; reforms of the supervision of entities acquiring and selling credit facilities (including non-performing loans) in Cyprus, of micro-credit providers in Greece and of credit reference agencies in Malta; and the exchange of information between the ECB and the Danish authorities in relation to anti-money laundering.
The ECB adopted opinions on draft national legislation concerning means of payment, including cash limitations in Greece, Spain and the Netherlands, the ban of the €500 banknote in Denmark, and the expanded provision of cash services in Sweden.
The ECB adopted opinions on draft national legislation concerning banking and financial regulation, including: the legal framework for covered bonds in Estonia; a guarantee scheme for securitisations of non-performing loans originated by credit institutions in Greece; the protection of primary residences in Greece and Ireland; restrictions on transfers of residential mortgage loans in Ireland and Poland; special taxes or levies applicable to banks and/or financial institutions in Lithuania, Romania and Slovakia; macroprudential tools for residential mortgages in Luxembourg; requirements applicable to financial undertakings’ remuneration policies in the Netherlands; the interest rate benchmark for consumer credit agreements in Romania; and the restructuring of Swiss franc consumer loans in Slovenia. The ECB also issued opinions on the impact of draft national legislation in the cybersecurity field on market infrastructures and credit institutions in Cyprus and Spain.
9.3 Compliance with the prohibition of monetary financing and privileged access
Pursuant to Article 271(d) of the Treaty on the Functioning of the European Union, the ECB is entrusted with the task of monitoring the compliance of the EU national central banks (NCBs) with the prohibitions implied by Articles 123 and 124 of the Treaty and Council Regulations (EC) Nos 3603/93 and 3604/93. Article 123 prohibits the ECB and the NCBs from providing overdraft facilities or any other type of credit facility to governments and EU institutions or bodies, as well as from purchasing in the primary market debt instruments issued by these institutions. Article 124 prohibits any measure, not based on prudential considerations, which establishes privileged access by governments and EU institutions or bodies to financial institutions. In parallel with the Governing Council of the ECB, the European Commission monitors Member States’ compliance with the above provisions.
The ECB also monitors the EU central banks’ secondary market purchases of debt instruments issued by the domestic public sector, the public sector of other Member States and EU institutions and bodies. According to the recitals of Council Regulation (EC) No 3603/93, the acquisition of public sector debt instruments in the secondary market must not be used to circumvent the objective of Article 123 of the Treaty. Such purchases should not become a form of indirect monetary financing of the public sector.
The prohibitions laid down in Articles 123 and 124 of the Treaty were in general respected
The ECB’s monitoring exercise conducted for 2019 confirmed that Articles 123 and 124 of the Treaty were in general respected.
The monitoring exercise revealed that most NCBs in 2019 had remuneration policies for public sector deposits in place that fully complied with the remuneration ceilings. However, a few NCBs need to ensure that the remuneration rate for public sector deposits is not above the ceiling.
Following up on the concerns raised in the ECB’s Annual Reports as of 2014, the ECB has continued to monitor programmes launched by the Magyar Nemzeti Bank in 2014 and 2015. In 2019 the Magyar Nemzeti Bank continued taking actions to alleviate the ECB’s concerns as regards the scope of its engagement in the Pallas Athéné Public Thinking Programme. The case should, however, not serve as a precedent. The ECB will continue monitoring the involvement of the Magyar Nemzeti Bank in the Budapest Stock Exchange as the purchase of the majority ownership of the Budapest Stock Exchange by the Magyar Nemzeti Bank in November 2015 may still be seen as giving rise to monetary financing concerns.
The Central Bank of Ireland’s reduction of assets related to the Irish Bank Resolution Corporation during 2019 through sales of long-duration floating rate notes is a significant step in the direction of the necessary full disposal of these assets. Continued sales at an appropriate pace would further mitigate the persisting serious monetary financing concerns.
10 The ECB in an EU and international context
In 2019 the ECB maintained its close dialogue with various European institutions, including the European Parliament which plays a key role in holding it accountable for its decisions. In international fora, the ECB engaged constructively in G20 discussions on the outlook for the global economy and, at the International Monetary Fund (IMF), the ECB actively contributed to a European perspective on international monetary and financial system issues as well as on the IMF’s reviews of its policies under its surveillance and lending framework. The ECB continues to cooperate with and assist non-EU central banks across the world.
10.1 The ECB’s accountability to the public
Accountability is the necessary counterpart to independence
The Treaty on the Functioning of the European Union gives a clear mandate to the ECB to maintain price stability in the euro area and states that the ECB is independent in using the relevant instruments for this purpose. The ECB’s mandate and independence were enshrined in the Treaty through a democratic process. By being independent, the ECB is able to carry out its tasks free of political pressures and short-term considerations that could divert it from fulfilling its mandate. At the same time, accountability is the necessary counterpart to independence: to ensure the legitimacy of its decisions, the ECB has the obligation to explain them to the public and to their elected representatives. This is complemented by the judicial review of ECB decisions by the Court of Justice of the European Union. In other words, independence and accountability ensure respectively that the ECB can and does act in accordance with its mandate. In an environment where central bank independence has received renewed attention, in 2019 several speeches were delivered by ECB Executive Board members on the link between independence and accountability.
The ECB is accountable to the European Parliament through multiple channels
The European Parliament plays a central role in holding the ECB accountable. In 2019 the Committee on Economic and Monetary Affairs of the European Parliament (ECON) held three of its regular hearings with the ECB President, including the first with Christine Lagarde (see Figure 3 below). In January 2019 President Mario Draghi also attended the Parliament’s plenary debate on the ECB Annual Report 2017, following which the European Parliament issued a resolution. The ECB provided feedback on this resolution. In 2019, 28 MEP letters containing written questions were sent to the ECB, the replies to which were published on the ECB’s website, providing an opportunity to clarify the ECB’s stance on a broad range of issues. The ECB is held accountable for its banking supervision activities by both the European Parliament and the EU Council. Furthermore, the European Court of Auditors and the ECB have agreed a Memorandum of Understanding that establishes practical information-sharing arrangements between the two institutions regarding audits on the ECB’s supervisory tasks.
Number of questions addressed to the ECB President in ECON regular hearings in 2019 by topic
2019 saw an all-time high in support for the euro
In 2019, the year of the 20th anniversary of the euro, Eurobarometer surveys reported that euro area citizens’ support for the euro had reached a new all-time high, with more than 75% of respondents in favour of the single currency. This trend is encouraging to the ECB, which will continue to strengthen its dialogue with the citizens and their representatives.
10.2 International relations
In 2019, G20 discussions under the Japanese Presidency focused on the outlook for the global economy and the policy measures that can be used to address a synchronised slowdown amid geopolitical uncertainties, trade conflicts and diminishing room for manoeuvre for macroeconomic policies. Trade tensions were discussed in each G20 meeting, though with limited progress. While leaders shared concerns about the risks to the global economy, they were divided on a number of topics, including the need for further action on climate change. The G20 continued its efforts to foster strong, sustainable, inclusive and balanced growth to improve the medium-term economic outlook. The group acknowledged progress in the financial regulatory reform agenda but also identified challenges still to be addressed, including the risks from growing non-bank financial intermediation. The G20 fostered considerable progress in international tax cooperation, with the aim of finalising an agreement by the end of 2020.
The G20 also followed up on the report of the G20 Eminent Persons Group on Global Financial Governance (EPG) entitled “Making the Global Financial System Work for All”, with a focus in 2019 on development issues. Work is continuing under the current G20 Presidency. Among the EPG proposals, those for improving global financial resilience are of particular interest to the ECB.
Policy issues related to the IMF and the international financial architecture
The ECB continued to play an active role in discussions about the international monetary and financial system at the IMF and in other fora, promoting the central bank perspective in common European positions. A key topic of debate in 2019 was the Fund’s resources. The ECB supports an adequately resourced IMF as a core component of the global financial safety net. In October 2019 the IMF membership endorsed a package of actions on IMF resources and governance reform, as part of which the membership expressed its support for maintaining the current level of resources through a doubling of the New Arrangements to Borrow and a further temporary round of bilateral borrowing beyond 2020. The package of actions needs to be implemented in the course of 2020 to avoid a decrease in IMF resources. The IMF’s Executive Board proposed to its Board of Governors a resolution concluding the 15th General Review of Quotas without a quota increase, which was adopted in February 2020. The 16th General Review of Quotas, which will conclude by mid-December 2023, will revisit the adequacy of quotas and continue the process of IMF governance reform.
The IMF continued a number of important reviews of policies under its surveillance and lending framework. First, it concluded its latest review of conditionality and the design of Fund-supported programmes, for which a report by the International Relations Committee of the European System of Central Banks (ESCB) helped shape the European position. The review recommended that programme conditionality should be more realistic, gradual and parsimonious, with sharper debt sustainability analysis, while ensuring strong national ownership and recognising country-specific circumstances. Second, there was progress on the debt sustainability framework review for market access countries, i.e. countries with significant access to international capital markets. Third, the IMF also started the quinquennial comprehensive surveillance review and the review of the Financial Sector Assessment Program.
International central bank cooperation
The ECB continued to cooperate with non-EU central banks across the globe. This reflects the global interest in ECB views, analytical frameworks and working processes. Staff-level discussions, also involving policymakers, covered core tasks of the ECB as well as technical and governance issues. Relations with key African, Asian and Latin American central banks were further developed based on existing bilateral Memoranda of Understanding, while cooperation with regional organisations and the IMF continued under the existing arrangements. In addition, a Eurosystem high-level policy dialogue with central banks from Latin America took place in Colombia in November.
The ECB continued to contribute to the EU enlargement process as an EU institution through targeted discussions with central banks in countries in the Western Balkan region that are working towards joining the EU. A regional workshop series serves as the main platform for this, where discussions are organised in close collaboration with EU national central banks where possible. In addition, an EU-funded programme was launched in March 2019 to the benefit of these central banks. It aims to strengthen central bank capacities in the Western Balkans, with a view to the integration of these central banks into the ESCB.
Implications of Brexit
While not party to the negotiations, the ECB has been following Brexit developments closely and assessing the risks to the euro area economy and financial system posed by all possible scenarios. The ECB acted to ensure its operational preparedness ahead of the initially foreseen end date of the Article 50 process, i.e. 29 March 2019, as well as ahead of the end dates of multiple extensions to the Article 50 process (12 April 2019, 31 October 2019 and 31 January 2020). Following the United Kingdom’s orderly withdrawal from the European Union on 31 January 2020, the ECB has been focusing on monitoring the negotiations around the future EU-UK relationship and assessing the consequences of Brexit for the EU financial sector, in particular as regards the need to complete the capital markets union.
The analysis in the May and November 2019 editions of the ECB Financial Stability Review discussed the risks stemming from a potential no-deal Brexit scenario, and the extent to which the private sector was prepared for such an event.
In the area of banking supervision, the ECB and national supervisors have continued to communicate supervisory expectations on Brexit-related issues, assessed banks’ operational readiness for a no-deal scenario, completed the majority of the Brexit-related authorisation procedures and monitored the implementation of banks’ Brexit plans (see the 2019 ECB Annual Report on supervisory activities).
In March 2019, the Bank of England decided to offer to lend euro to UK banks in weekly operations on the basis of the standing swap line with the ECB. In a related press release the Eurosystem stated its readiness to lend pound sterling to euro area banks, should the need arise. So far, these pound sterling lending operations have not been activated by the ECB. At his September 2019 European Parliament hearing, ECB President Mario Draghi emphasised the continuous cooperation between the ECB and the Bank of England in addressing all contingencies, including a no-deal Brexit.
The situation at the cut-off date for data in this report was that a withdrawal agreement had been ratified by both parties, leading to the initiation of a transition period.
11 Enhancing communication
“The ECB needs to listen and understand the people. Because a currency is after all a public good that belongs to the people.” – President Christine Lagarde
Communication is a core element of the ECB’s policy toolbox. Providing financial market experts with information about its current policy stance and the expected path for future decisions has bolstered the effectiveness of ECB policies. There is broad evidence that the ECB’s communication with financial markets and experts is successful. The new frontier in central bank communication is engagement with the general public. Central banks, including the ECB, need to be better understood by the people whom they ultimately serve. This is key to rebuilding people’s trust in the ECB, especially against the backdrop of increased public scrutiny and controversial debates over its policy decisions.
With the change in the leadership of the ECB during 2019, the bank’s communication to audiences beyond the traditional group of experts and financial market specialists received renewed impetus. The ECB invested in further enhancing its communications, so as to make itself better understood and to explain why its actions matter to people and their lives. It also built further on its efforts to reach out to groups in society that had not traditionally been the focus of ECB communications, such as young people or civil society organisations, and started to listen more attentively to people’s concerns. Looking ahead, there is great potential in connecting the ECB to the topics that are of particular concern to people, such as inequality, digital currencies or climate change – and in providing clearer answers on how the ECB can contribute, within the limits of its mandate, in these areas. Communication will also be a key element of the ECB’s monetary policy strategy review.
11.1 Innovation in ECB communications
In order to reach out to broader and younger audiences, the ECB uses innovative forms of communication.
For instance, in early 2019, as part of the initiatives marking the 20th anniversary of the euro, the ECB launched a campaign in cooperation with the popular app QuizClash. The #EUROat20 competition aimed to raise awareness and understanding of the ECB’s mission, especially among young people. Over 1.6 million people across the European Union took part in the quiz, engaging with and learning about issues related to the euro and the ECB through playful interaction.
The #EUROat20 competition on the QuizClash app
Making the ECB relevant to the broader public by connecting its work to topics that people are interested in, using simple, relatable messages
While the campaign was a great success in terms of its reach, it also revealed certain misconceptions and knowledge gaps in relation to the ECB’s institutional set-up and mission. This showed that the ECB needs to fill these gaps by connecting its work to topics that people are interested in, using simple, relatable messages. In September 2019 a new one-minute “ECB explains” video series was launched in which ECB staffers explain, in simple and accessible language, particular topics, such as crypto-assets or accountability, and describe why their work matters to people. The series runs on the ECB’s Instagram account, itself an innovation aimed at increasing understanding of the ECB among broader audiences, which reached the one-year mark in 2019.
In September 2019 the ECB also launched the monthly ECB Podcast. Given the rapidly increasing popularity of podcasts, this presents an opportunity for the ECB to connect with new audiences, engaging in in-depth discussions on key issues relevant to the ECB, while also allowing for a more informal tone.
During 2019 an effort was made in ECB communications to address topics and trends beyond core monetary policy which are important for the ECB and matter to people in the euro area. In May, for example, the ECB published a webpage on climate change. The webpage contains information on the ECB’s actions to mitigate climate change, listing internal initiatives as well as relevant publications (see also Box 3).
The ECB’s aim to communicate with non-expert audiences also foresees an increase in the use of national languages in order to foster a closer connection with the euro area citizens. To be able to do this in a cost-efficient way, the ECB adopted machine-learning technology to support internal translation processes.
On Twitter and LinkedIn, Christine Lagarde’s accounts more than doubled the ECB’s reach to over 2.5 million followers
With Christine Lagarde’s arrival as ECB President in November 2019 the bank’s digital footprint and outreach expanded markedly. For instance, on Twitter and LinkedIn, where the ECB already had an institutional presence, Christine Lagarde’s personal accounts more than doubled the ECB’s reach to over 2.5 million followers. Furthermore, Ms Lagarde’s presence on the Chinese platform Weibo added yet another 5.8 million followers. These accounts serve as powerful amplifiers for the ECB’s efforts to make itself understood.
11.2 Analytics to enhance the impact of ECB communications
Data and analytics at the heart of an evidence-based design of ECB communication activities
For ECB communications to be effective and achieve the desired impact, it is essential to better understand who the target audiences are, what resonates with them, and what the most useful channels are to reach them. In addition, deeper analysis of the entire communications process is needed, i.e. analysis of what happens between the sending and the receiving of central bank communications, of the related dynamics and feedback mechanisms, and of the role of intermediaries such as the media or financial markets. Finally, through advanced analytics, the ECB can gain robust insights into the performance of its own communications efforts, finding out whether its messages do in fact “get through” and lead to a change in attitudes and greater trust.
In 2019 the ECB intensified its internal research and analytics activities and expanded its external research collaboration.
An ECB study indicates that young people have a superficial understanding of the ECB and little interest in economic and financial matters
In order to gain insights into how its communications resonate with the general public, in particular with younger people, the ECB launched a focus group study among participants aged 18 to 35 years in six euro area countries. Besides assessing awareness, knowledge and perception of the ECB among young people, the research also aimed to identify topics of interest with regard to economic, financial and social issues, as well as preferred ways of engagement. The findings suggest that young people not only have a very superficial understanding of the ECB but also a limited interest in economic and financial matters. They find issues like climate change and social responsibility more relevant. The research also indicated that the majority of young people prefer to engage with the ECB via social media, which – together with their own social networks (word of mouth) – are their main sources of information.
Successful “layered” presentation of core messages from ECB publications to attract broader interest
In evaluating its own communications efforts, the ECB also tested and analysed how best to present information across digital platforms. For example, it pursued a “layered” approach to its publications, whereby the publication of key ECB reports is complemented by landing pages on the ECB’s website and social media campaigns, making findings more accessible, visual and easy to digest. The results provide empirical evidence that this approach is a success, as it induces more people to access the actual publication and, once they access it, to spend 50% more time reading it. Such insights are the basis for future, adapted communications.
New landing page for the ECB Financial Stability Review
Fruitful interaction with academia to advance interdisciplinary research on central bank communication
In expanding and deepening its research efforts regarding central bank communication, the ECB initiated, and is co-chairing, a Research and Policy Network on Central Bank Communication, established within the framework of the Centre for Economic Policy Research (see also Section 8.1). In October 2019 the ECB hosted a two-day workshop of the network which brought together communications practitioners from the ECB and other central banks, financial market analysts, journalists, and academics from a variety of disciplines, such as economics, psychology and sociology. Discussions focused on the risks and opportunities involved in communicating with the wider public, the boundaries of central bank transparency, and the changing role of the media as intermediaries of central bank communication. In this context, in October 2019 the ECB was the first – and is as yet the only – central bank to make available a precompiled, easy-to-use and regularly updated dataset comprising all speeches of its policymakers. By providing the dataset, the ECB intends to incentivise and facilitate novel research on its communications, for instance through text analysis.
12 Organisation and good governance
The ECB is an EU institution at the heart of the Eurosystem and the Single Supervisory Mechanism. More than 3,500 staff from all over Europe work for the ECB. The ECB is committed to inspiring and engaging its people and to their development, and in 2019 it continued its efforts to foster diversity and inclusion as key drivers of improved organisational performance. Moreover, the ECB further strengthened its commitment to the highest level of integrity and governance standards. The entry into force of its Single Code of Conduct for high-level ECB officials on 1 January 2019 was a milestone in this respect. Last but not least, in 2019 the ECB proudly celebrated the 20th anniversary of the euro, the currency of 340 million Europeans (see Box 12).
12.1 Unlocking excellence through leadership, inclusion and people development
Fostering diverse teams and inclusive behaviour is vital to ensuring the ECB can deliver the best possible outcomes for its staff and for the EU. That is why diversity, respect, an ethical culture and the well-being of its staff are strategic objectives for the ECB.
Diversity and inclusion are key drivers of improved organisational performance
In 2019 the ECB continued its efforts to foster diversity and inclusion as key drivers of improved organisational performance. The ECB has a number of long-standing diversity networks that engage frequently with Human Resources and aim to serve the needs of all aspects of diversity. In 2019 a new network was founded called DiversAbility, the ECB’s professional network for those with long-term health-related impairments and those who support them.
At the level of the European System of Central Banks (ESCB) and the Single Supervisory Mechanism (SSM), the ECB continues to conduct exchanges with national central banks and national supervisory authorities regarding best practices in diversity and inclusion, an example of which was the fourth annual meeting of the ESCB/SSM Diversity Network, hosted by the Bundesbank in Eltville am Rhein in September 2019. The ECB also participated in a summit on gender diversity in May 2019, joining the Human Resources heads of the G7 central banks along with colleagues from across the ESCB/SSM and from the International Monetary Fund.
In 2019 the ECB’s comprehensive programme of inclusion activities included for the first time participating in Frankfurt’s Christopher Street Day (Pride) parade and holding events to mark the International Day of People with Disabilities, Coming Out Day and the International Day of Commemoration in memory of the victims of the Holocaust. Regular highlights on the ECB calendar included events held to mark the International Women’s Day and the International Day against Homophobia, Biphobia, Interphobia and Transphobia (IDAHOBIT).
The ECB is continuing to work towards achieving a more gender-balanced working environment and in 2019 was independently assessed in this area, receiving in February an ASSESS level (level 1) Economic Dividends for Gender Equality (EDGE) Certification, which recognises the ECB’s commitment to fostering gender equality in the workplace.
To improve gender balance, the ECB’s Executive Board had set targets for the end of 2019. At the end of the year, 30.3% of management positions were held by women, compared with a target of 35%. For senior management roles, the share was 30.8%, against a target of 28% (see Table 2). The overall share of female staff at the ECB at all levels was 45.3%. See Box 10 in Chapter 8 for information on gender balance in career progression at the ECB.
Gender targets and share of female staff at the ECB
In order to attract diverse talent, in 2019 the ECB redesigned its vacancy notices to be more inclusive by explicitly encouraging candidates to apply irrespective of age, disability, ethnicity, gender, gender identity, religion, sexual orientation or other characteristics. The ECB also continued to reach out to candidates via inclusive recruitment platforms, including participating in Sticks & Stones, Europe’s largest LGBT+ career fair, and the European Women in Tech Conference.
The ECB is committed to the growth and development of its staff and has consistently offered a wide range of learning and development opportunities to support them in facing the challenges of a constantly changing world. Over the last year the ECB worked at the ESCB/SSM level to develop a cohesive system-wide strategy for learning and development in order to support its talent across the system in delivering for Europe. This builds upon existing local learning initiatives which have been open to colleagues throughout the ESCB and SSM, and aims to foster a learning culture that links learning and development with productivity, capability and efficiency.
Leaders play a central role in enhancing the performance of both individuals and teams for the benefit of the organisation. With this in mind, the ECB successfully ran a modular Leadership Growth Programme over the last few years, which came to an end in November 2019. The programme engaged with more than 600 leaders at all levels, including non-managerial team leads, with the aim of strengthening leadership behaviours and thereby improving organisational performance and building strong teams around a shared vision, purpose and aspiration to create a stronger ECB.
In 2019 the ECB performed a fundamental review of how it supports the professional growth of its staff, the result of which was the implementation of a new comprehensive career framework. The framework comprises new methods for promoting staff and changes to the processes and policies that facilitate and incentivise mobility (i.e. changing roles within the bank or gaining experience outside the bank) as an opportunity for growth. These changes position the ECB as an employer of choice, whilst maintaining staff engagement and supporting the development of the individuals who make up the ECB.
12.2 Further strengthening integrity and governance standards
The monthly calendars and Declarations of Interests of all high-level officials are published on the ECB’s website
With the entry into force of its Single Code of Conduct for high-level ECB officials (the “Single Code”) on 1 January 2019, the ECB reconfirmed its commitment to the highest level of integrity and governance standards. Introducing specific rules for post-employment activities, private financial transactions and relations with interest groups, the Single Code also obliges all members of high-level ECB bodies to publish their monthly calendars (as of January 2019) and on an annual basis to submit their signed Declarations of Interests to the Ethics Committee for assessment and subsequent publication on the ECB’s website.
The Ethics Committee, moreover, advises members of high-level ECB bodies on any other questions of professional ethics, in particular with regard to post-employment activities and gainful occupational activities of family members. Commensurate with the increasing relevance of matters relating to good conduct and good governance the ECB introduced, for all incoming and outgoing members of high-level ECB bodies, dedicated on-boarding and end-of-term meetings with the ECB’s Chief Compliance and Governance Officer to address obligations stemming from the Single Code.
The cooperation among euro area central banks and national supervisory authorities via the Ethics and Compliance Officers’ Task Force (ECTF) gained further momentum in 2019. The ECTF developed into a hub for information exchange and a forum supporting coherent implementation of the Single Code across the Eurosystem and European banking supervision. With a view to generating additional reciprocal learning opportunities, the ECTF organised thematic sessions with external counterparts including the UN Ethics Office, the Office of the European Ombudsman and the European Court of Auditors, with the latter presenting its report on the ethical frameworks of selected audited EU institutions.
As regards members of staff, in 2019 the annual compliance check of their private financial transactions covered a random sample consisting of 10% of all staff, including the ECB members of ECB high-level bodies. In addition, the ECB followed the advice of its external service provider and conducted an ad hoc compliance check in 2019, which concentrated on a specific group of staff members.
In accordance with its mandate, the ECB’s Audit Committee continued to assist the Governing Council in its tasks and responsibilities related to the integrity of financial information; the oversight of internal controls; the compliance with applicable laws, regulations and codes of conduct; and the performance of audit functions. In 2019 the Audit Committee focused in particular on cyber risks, on the adequacy of the Eurosystem’s financial risk management framework and on incentivising a proactive approach when monitoring the follow-up to audit recommendations.
Guided by the principles of transparency and accountability, the members of the ECB’s high-level bodies maintain regular contacts and interaction with the public as well as specialised audiences from the public and private sectors, academia, interest groups and representative associations. These dialogues and debates take place under a well-established and public framework that guarantees a robust level of transparency and good governance.
In 2019 the ECB responded to 113 public access requests from EU citizens and gave access to over 200 documents (some of which were partially disclosed).
Furthermore, as part of its continuous commitment to good governance and transparency, in 2019 the ECB decided to introduce a new policy under which the documents from the Committee of Governors and the European Monetary Institute – predating the establishment of the ECB in June 1998 – would be declared as historical records, thus making it easier for the general public to access them.
The euro at 20
On 1 January 2019 our common currency, the euro, celebrated its 20th anniversary. Twenty years before, on 1 January 1999, 11 countries of the European Union (EU) fixed their exchange rates and adopted a shared monetary policy, the conduct of which was entrusted to the ECB. The euro started as an electronic currency, used for cashless payments and by financial markets. Euro banknotes and coins entered into circulation three years later, on 1 January 2002. Today, the euro is the currency of 19 EU countries and over 340 million Europeans. As the second most important currency in the world – with the US dollar being the first – it is part of our everyday life and the most tangible symbol of the European project. Support for the euro among euro area citizens stands at an all-time high, with 76% of Eurobarometer survey respondents thinking that the single currency is good for the EU (Eurobarometer survey, November 2019).
20 years of the common currency
The EU countries that adopted the euro on 1 January 1999, and those that joined subsequently, have travelled a long way together. The last 20 years were exceptional for the euro area. The first decade could be seen as the culmination of a 30-year upswing in the global financial cycle. The second decade, by contrast, saw the worst economic and financial crises since the 1930s – first a global financial crisis, then a sovereign debt crisis.
The European project including Economic and Monetary Union (EMU) is a process that is evolving over time. Taking a closer look at the economic structures 20 years into the euro, it can be argued that the global financial and sovereign debt crises revealed the resilience of the euro area’s economic structures. Significant efforts were made by countries in the euro area to react to the crisis and to strengthen this resilience. Crisis momentum was also used to strengthen EMU. In particular, the establishment of European banking supervision was a major achievement. However, EMU is still incomplete. Further progress is needed to optimise the advantages of the common currency to the benefit of all Europeans.
ECB celebrated the #EUROat20
The 20th anniversary of the euro was an important milestone for the ECB, which celebrated on several occasions. With events including art and music performances (as part of the European Cultural Days of the ECB, dedicated to Europe’s common culture and identity in 2019), social media campaigns – see the ECB-QuizClash competition – and high-level central banking conferences, in particular the ECB Forum on Central Banking in Sintra on 17-19 June 2019, the euro’s 20th birthday provided a good opportunity to connect with European citizens.
Most notably, the theme of the above-mentioned ECB Forum in Sintra was “20 years of European Economic and Monetary Union”. It covered the experience of EMU so far and crucial factors for its success going forward. Participants discussed diverse progress with economic convergence, the role of fiscal policies relative to monetary policy in macroeconomic stabilisation in the incomplete monetary union, and selected key determinants of future growth in the euro area (such as demographic forces). The main themes are represented in the illustration below.
20 years of European Economic and Monetary Union – a graphic illustration from the ECB Forum on Central Banking in Sintra
Consolidated balance sheet of the Eurosystem as at 31 December 2019https://www.ecb.europa.eu/pub/annual/balance/html/ecb.eurosystembalancesheet2019~fed8c5244a.en.html
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The cut-off date for the data included in this report was 10 March 2020.
For specific terminology please refer to the ECB glossary (available in English only).
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- For more information on trade-related uncertainty, see “Tracking global economic uncertainty: implications for global investment and trade”, Economic Bulletin, Issue 1, ECB, 2020.
- The outlook at the end of 2019 did not anticipate any impact or downside risk from the coronavirus outbreak as this information was not known at the time.
- For an overview of the interaction between the manufacturing and services sectors, see the box entitled “Developments in the services sector and its relationship with manufacturing”, Economic Bulletin, Issue 7, ECB, 2019.
- For instance, investment in intellectual property products in Ireland distorted growth in euro area investment in the second and third quarters of 2019.
- See “A revised consumer confidence indicator”, European Commission, 21 December 2018.
- For details on how these indicators are constructed, see “Indicators of labour market conditions in the euro area”, Economic Bulletin, Issue 8, ECB, 2019.
- For more details on labour supply developments in the euro area, see the article entitled “Labour supply and employment growth”, Economic Bulletin, Issue 1, ECB, 2018.
- For more details on the relationship between employment and productivity during the current employment expansion, see the box entitled “Employment growth and GDP in the euro area”, Economic Bulletin, Issue 2, ECB, 2019, and the box entitled “How does the current employment expansion in the euro area compare with historical patterns?”, Economic Bulletin, Issue 6, ECB, 2019.
- See, for example, Charbonneau, K., Evans, A., Sarker, S. and Suchanek, L., “Digitalization and Inflation: A Review of the Literature”, Staff Analytical Note 2017-20, Bank of Canada, November 2017.
- See, for example, Masuch, K., Anderton, R., Setzer, R. and Benalal, N. (eds.), “Structural policies in the euro area”, Occasional Paper Series, No 210, ECB, June 2018.
- For more details on the implementation of the CSRs, see the box entitled “Country-specific recommendations for economic policies under the 2019 European Semester”, Economic Bulletin, Issue 5, ECB, 2019.
- The fiscal stance reflects the direction and size of the stimulus from fiscal policies to the economy, beyond the automatic reaction of public finances to the business cycle. It is measured as the change in the cyclically adjusted primary balance ratio net of government support to the financial sector. For more information on the concept of the euro area fiscal stance, see the article entitled “The euro area fiscal stance”, Economic Bulletin, Issue 4, ECB, 2016.
- “The review of draft budgetary plans for 2020 – some implications for a reform of fiscal governance”, Economic Bulletin, Issue 8, ECB, 2019.
- Average headline inflation in 2018 was revised up to 1.8% from 1.7% by Eurostat after the cut-off date for data in the 2018 Annual Report. The revision followed the implementation of methodological changes to the Harmonised Index of Consumer Prices (HICP) by Eurostat. These changes also implied an upward revision to the average services inflation rate in 2018, to 1.5% from 1.3%, and a downward revision to the average non-energy industrial goods inflation rate in 2018, to 0.3% from 0.4%. These changes, however, had only a mild impact on average HICP inflation excluding energy and food in 2018, which remained unchanged at 1.0%. In contrast to these rather muted effects, the impact on monthly and annual inflation rates of the year 2015 was particularly strong. Average headline inflation for 2015 was revised upwards by 0.2 percentage points and HICP inflation excluding energy and food by 0.3 percentage points. See “A new method for the package holiday price index in Germany and its impact on HICP inflation rates”, Economic Bulletin, Issue 2, ECB, 2019, and Monthly Report, Deutsche Bundesbank, March 2019, pp. 8-9.
- Statistical changes to the measures of package-holiday prices in Germany have had a temporary downward impact on euro area services inflation; see Monthly Report, Deutsche Bundesbank, August 2019, pp. 57-59.
- See Bobeica, E. and Sokol, A., “Drivers of underlying inflation in the euro area over time: a Phillips curve perspective”, Economic Bulletin, Issue 4, ECB, 2019. This analysis focuses on an in-sample decomposition of inflation. For a recent analysis of the forecasting performance of this type of model, as well as of the predictive power of different types of variables for inflation, see Moretti, L., Onorante, L. and Zakipour Saber, S., “Phillips curves in the euro area”, Working Paper Series, No 2295, ECB, July 2019.
- See Ciccarelli, M. and Osbat, C. (eds.), “Low inflation in the euro area: Causes and consequences”, Occasional Paper Series, No 181, ECB, January 2017.
- The expectations measures underlying Chart A are both short and long-term survey-based inflation expectations from the ECB’s Survey of Professional Forecasters and from Consensus Economics.
- External influences might, of course, not be limited to what is captured by import and energy prices. For a discussion of additional mechanisms, see Lane, P., “Globalisation and monetary policy”, speech at the University of California, 30 September 2019.
- Jarociński, M. and Lenza, M., “An Inflation-Predicting Measure of the Output Gap in the Euro Area”, Journal of Money, Credit and Banking, Vol. 50(6), 2018, pp. 1189-1224.
- Compensation per employee growth was held back by the decrease of employers’ social security contributions in France due to a legislative change (the replacement of the CICE tax credit by a permanent cut in employers’ social security contributions).
- See the box entitled “How do profits shape domestic price pressures in the euro area?”, Economic Bulletin, Issue 6, ECB, 2019.
- The Eurosystem aims for a market-neutral asset allocation, purchasing securities across all eligible maturities in all jurisdictions in a way that reflects the composition of the euro area government bond market.
- The ECB publishes the expected monthly redemption amounts for the APP over a rolling 12-month horizon.
- See “General APP securities lending framework” on the ECB’s website for information on securities lending under the CBPP3 and the ABSPP. It should be noted that securities purchased under the Securities Markets Programme, the CBPP and the CBPP2 are also made available for lending by the Eurosystem.
- The ECB publishes on a monthly basis for the PSPP the aggregate monthly average on-loan balance for the Eurosystem and the aggregate monthly average amount of cash collateral received.
- See “The financial risk management of the Eurosystem’s monetary policy operations”, ECB, July 2015.
- See also the “Asset purchase programmes” page on the ECB’s website.
- ABSs are required to have at least two credit ratings by an ECAI.
- See Article 138, paragraph 3(b), of Guideline (EU) 2015/510 of the European Central Bank of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (OJ L 91, 2.4.2015, p. 3).
- On 12 September 2019 the Governing Council decided to extend the possibility of buying assets with yields below the interest rate on the deposit facility, to the extent necessary, under all parts of its APP. For further details, see “ECB provides additional details on purchases of assets with yields below the deposit facility rate”, press release, ECB, 12 September 2019.
- The issuer limit refers to the maximum share of an issuer’s outstanding securities that the Eurosystem could hold.
- See the special feature entitled “Climate change and financial stability”, Financial Stability Review, ECB, May 2019.
- See Carney, M., “Breaking the Tragedy of the Horizon – climate change and financial stability”, speech given at Lloyd’s of London, 29 September 2015.
- See Cœuré, B., “Monetary policy and climate change”, speech given at a conference on “Scaling up Green Finance: The Role of Central Banks”, organised by the Network for Greening the Financial System, the Deutsche Bundesbank and the Council on Economic Policies, Berlin, 8 November 2018.
- See the May 2019 and November 2019 issues of the ECB’s Financial Stability Review.
- See de Guindos, L., “Implications of the transition to a low-carbon economy for the euro area financial system”, speech given at the European Savings and Retail Banking Group conference “Creating sustainable financial structures by putting citizens first”, Brussels, 21 November 2019.
- See SSM Risk Map for 2020.
- For more information on the ECB’s supervisory activities in relation to climate change, see the box entitled “Green finance” in the 2019 ECB Annual Report on supervisory activities.
- The new EU regulation, which outlines the Pillar 1 treatment for NPEs, is Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures (OJ L 111, 25.4.2019, p. 4). It entered into force on 26 April 2019.
- See Chapter 4 for more details.
- The common backstop to the Single Resolution Fund, which will be provided by the European Stability Mechanism, is a safety net aimed at ensuring that the Single Resolution Fund has additional resources to support any necessary resolution measures.
- See also the Opinion of the European Central Bank of 8 November 2017 on revisions to the Union crisis management framework (CON/2017/47).
- Further harmonisation and standardisation, building on the single rulebook as a harmonised regulatory framework, are key to achieving a genuine capital markets union.
- See “Reforming major interest rate benchmarks – Progress report”, Financial Stability Board, 18 December 2019.
- In accordance with Article 141(2) of the Treaty on the Functioning of the European Union, Articles 17, 21.2, 43.1 and 46.1 of the Statute of the ESCB, and Article 9 of Council Regulation (EC) No 332/2002 of 18 February 2002.
- In accordance with Articles 122(2) and 132(1) of the Treaty on the Functioning of the European Union, Articles 17 and 21 of the Statute of the ESCB, and Article 8 of Council Regulation (EU) No 407/2010 of 11 May 2010.
- In accordance with Articles 17 and 21 of the Statute of the ESCB (in conjunction with Article 3(5) of the EFSF Framework Agreement).
- In accordance with Articles 17 and 21 of the Statute of the ESCB (in conjunction with Article 5.12.1 of the ESM General Terms for Financial Assistance Facility Agreements).
- In the context of the loan facility agreement between the Member States whose currency is the euro (other than Greece and Germany) and Kreditanstalt für Wiederaufbau (acting in the public interest, subject to the instructions of and with the benefit of the guarantee of the Federal Republic of Germany) as lenders and the Hellenic Republic as borrower and the Bank of Greece as agent to the borrower, and pursuant to Articles 17 and 21.2 of the Statute of the ESCB and Article 2 of Decision ECB/2010/4 of 10 May 2010.
- Exchange rate mechanism (ERM II) interventions at the margins are interventions that take place when a currency’s exchange rate against the euro reaches the margins of its pre-agreed fluctuation band (i.e. the band within which ERM II member currencies are allowed to fluctuate against the euro). These interventions are, in principle, automatic and unlimited.
- For instance, see “Boosting Europe”, European Banking Federation, 2019.
- Here we refer primarily to the datasets related to the reporting obligations of deposit-taking corporations set out in: the ECB statistical regulations on balance sheet items and interest rates of monetary financial institutions; the sectoral module of the Regulation concerning statistics on holdings of securities; and the AnaCredit Regulation on granular credit and credit risk data.
- See “Dataset and indicators to monitor the crypto-assets phenomenon”, ECB staff presentation; an ECB staff article on this topic will also feature in the forthcoming Irving Fisher Committee on Central Bank Statistics (IFC) Working Group on Fintech data report (H1 2020).
- See ECB Crypto-Assets Task Force, “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures”, Occasional Paper Series, No 223, ECB, May 2019, and the article entitled “Understanding the crypto-asset phenomenon, its risks and measurement issues”, Economic Bulletin, Issue 5, ECB, 2019.
- See “2018 IFC Annual Report”, Irving Fisher Committee on Central Bank Statistics, Bank for International Settlements, March 2019.
- See “Characterisation of the euro area fintech scene”, Financial Integration and Structure in the Euro Area, ECB, March 2020.
- The €STR is published on the ECB’s website, via the ECB’s Market Information Dissemination (MID) platform, and in the ECB’s Statistical Data Warehouse (SDW), with the MID platform being the main publication channel.
- The reporting requirements for the MMSR as well as a list of the current reporting agents are available on the ECB’s website. The regular MMSR data collection started on 1 July 2016.
- For further details, see “G20 Data Gaps Initiative (DGI-2): The Fourth Progress Report – Countdown to 2021”, Financial Stability Board and International Monetary Fund, 2019.
- See Cozzi, G. et al., “Macroprudential policy measures: macroeconomic impact and interaction with monetary policy”, Working Paper Series, No 2376, ECB, February 2020, and Albertazzi, U. et al., “Monetary policy and bank stability: the analytical toolbox reviewed”, Working Paper Series, No 2377, ECB, February 2020.
- Cavalleri, M. C., Eliet, A., McAdam, P., Petroulakis, F., Soares, A. and Vansteenkiste, I., “Concentration, market power and dynamism in the euro area”, Working Paper Series, No 2253, ECB, March 2019.
- Hospido, L., Laeven, L. and Lamo, A., “The gender promotion gap: evidence from central banking”, Working Paper Series, No 2265, ECB, April 2019.
- More precisely, the analysis includes the Directorates General Economics, Macroprudential Policy & Financial Stability, International & European Relations, Market Infrastructure & Payments, Market Operations, Monetary Policy, Research, and Statistics, and the Directorate Risk Management.
- Cases of non-compliance include: (i) cases where a national authority failed to submit draft legislative provisions within the ECB’s fields of competence for consultation to the ECB; and (ii) cases where a national authority formally consulted the ECB, but did not afford it sufficient time to examine the draft legislative provisions and to adopt its opinion prior to adoption of these provisions.
- In particular, Yves Mersch reflected on the principles of necessity, proportionality and probity with regard to central bank independence at the ECB and its Watchers XX conference in Frankfurt in March. He also provided the ECB’s perspective on international trends in central bank independence during a roundtable discussion that took place in Frankfurt in November.
- For more information on the implications of Brexit, which was one of the issues discussed in the hearings, please refer to Box 11 below.
- More detailed information is provided in the 2019 ECB Annual Report on supervisory activities.
- In summer 2019 Mr Patrick Honohan succeeded Mr Jean-Claude Trichet as Chairman of the Ethics Committee.
- See Decision (EU) 2015/433 of the European Central Bank of 17 December 2014 concerning the establishment of an Ethics Committee and its Rules of Procedure (ECB/2014/59).