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Niko Herrala

2 May 2017
This paper provides a comprehensive overview of the use of the Eurosystem's monetary policy instruments and the operational framework from the third quarter of 2012 until the first quarter of 2016. The paper reviews the context of Eurosystem market operations, counterparty and collateral framework, participation in tender operations, recourse to standing facilities, patterns of reserve fulfilment, outright asset purchase programmes, as well as the impact of the ECB’s monetary policy implementation on the Eurosystem's balance sheet and liquidity conditions.
JEL Code
D02 : Microeconomics→General→Institutions: Design, Formation, and Operations
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes
G01 : Financial Economics→General→Financial Crises
26 May 2017
14 November 2017
Since 2008, excess liquidity – defined as the sum of holdings of central bank reserves in excess of reserve requirements and holdings of equivalent central bank deposits – has tended to accumulate in specific euro area countries and in a small, slowly changing group of credit institutions. Despite the stability of the concentration of excess liquidity in specific countries over time, the relevance of individual drivers has changed. First, risk aversion has played a much smaller role in explaining the concentration since 2013 than it did at the time of “flight-to-quality” phenomena in the period 2010-12. Second, the location of the relevant market infrastructures (i.e. central securities depositories, securities settlement systems and TARGET2 accounts) used by counterparties that sold assets to the Eurosystem has been a more important driver directing flows in the period 2015-16. In addition, the more recent concentration of excess liquidity is explained by the combination of a number of factors, such as banks following strict internal credit limits, investment incentives created by yield differences across the euro area and the “home bias” in euro area government bond holdings. Overall, the net cross-border flows of liquidity that resulted also determined TARGET2 balances. At the individual bank level, when controlling for banks’ capital, non-performing loans, credit risk and profitability, excess liquidity holdings in relation to total assets are found to be higher for smaller and better-capitalised banks, and for banking groups with liquidity centralised at the head institution. In addition, participation in Eurosystem longer-term refinancing operations and deposit inflows are associated with liquidity accumulation. Finally, new regulatory initiatives such as the liquidity coverage ratio are explained to be creating incentives to hold or not to distribute liquidity, thereby affecting its distribution.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
G01 : Financial Economics→General→Financial Crises
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
D39 : Microeconomics→Distribution→Other
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
12 August 2019
A US dollar funding premium in the EUR/USD cross currency swap market has been in existence since 2008. Whilst there are many reasons behind this dislocation, since 2014 the divergence in monetary policy between the euro area and the United States has played a growing role. This paper aims at exploring and gaining more insight into the role the Eurosystem’s Expanded Asset purchase Programme (APP) has had in guiding investment and funding decisions and its influence on the cross currency basis. The downward pressure on yields, exerted by the APP, has made euro assets less attractive and has led investors to search for yield abroad. At the same time, the decline in yields and tighter credit spreads have attracted US corporate issuers to the euro market in search of cheaper funding costs. These cross-border flows from issuers and investors have played a strong role in driving the US dollar funding premium. The purpose of this study is to gauge whether these changing trends in cross-border flows have implications for the implementation of the Eurosystem’s APP. Beyond the structural increase in the US dollar funding premium described above, a cyclical component has led to an amplification of the premium over balance sheet reporting dates, due to new bank regulations. This paper also analyses the behaviour of euro area banks in cross currency swap markets over balance sheet reporting dates, using the money market statistical reporting (MMSR) dataset in order to discern whether the increase in the US dollar funding premium at these specific points in time has an adverse impact on the transmission of monetary policy.
JEL Code
D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G15 : Financial Economics→General Financial Markets→International Financial Markets
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation