impact of reductions in reserves in the euro area€¦ · 2015-q1 2015-q2 2015-q3 2015-q4 2016-q1...

Impact of Reductions in Reserves in the euro area

Monetary Policy Implementation Workshop New York, 28 September 2018

Cornelia Holthausen European Central Bank

ECB-PUBLIC

The views expressed in this presentation are the authors’ and may not necessarily coincide with those of the ECB or the Eurosystem.

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www.ecb.europa.eu ©

Bank reserves are still increasing in the euro area

Eurosystem balance sheet and excess liquidity

2

Note: Selected items from the assets (+) and (net) liabilities (-). Source: ECB.

Eurosystem balance sheet items Excess liquidity

Note: excess liquidity is defined as the daily reserve surplus (i.e. holdings above reserve requirements) plus deposit facility holdings and minus reliance on the marginal lending facility. Source: ECB.

ECB-PUBLIC

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EONIA very close to the deposit facility rate

Short term money market rates are flat

Impact of Reductions in Reserves 3

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Overview

4

1

2

3

Interaction with regulation

Interaction with market segmentation

Interaction with HQLA supply and demand

ECB-PUBLIC

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Large LCR buffers and a large supply of high quality liquid securities

Note: 25th and 75th percentiles, median and weighted average LCR. Source: EBA Risk Dashboard for 190 banks.

Notes: total of high quality liquid securities supplied by governments and private entities, market value after LCR haircuts and before ECB operations, as of 2017-Q3. Source: Eurosystem calculations.

LCR compliance and HQLA supply

5

ECB-PUBLIC

Liquidity coverage ratio of EU banks Stock of HQL securities

0

2,000

4,000

6,000

8,000

10,000

12,000

EUR

bn

Level 2

Level 1 Covered Bond

Level 1 Government

0%

50%

100%

150%

200%

250%

300%

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Jan-

18

Mar

-18

Interquartile range

Median

Weighted average

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0500

1,0001,5002,0002,5003,0003,5004,000

2015

-Q1

2015

-Q2

2015

-Q3

2015

-Q4

2016

-Q1

2016

-Q2

2016

-Q3

2016

-Q4

2017

-Q1

2017

-Q2

2017

-Q3

2017

-Q4

2018

-Q1

EUR

bn

L1 government (domestic) L1 government (other) L1 covered bondsL2a corporate bonds L2a covered bonds L2a governmentL2b ABS L2b corporate bonds L2b covered bondsExcess liquidity

Euro area banks will want to replace part of the current reserve holdings with securities

Euro area banks’ HQLA holdings by type of HQLA

6

Note: see also forthcoming ECB Occasional Paper. Source: Eurosystem.

ECB-PUBLIC

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Redistribution of HQLA probably more relevant than the reduction • Exit from unconventional policy has a fairly neutral effect on HQLA

supply: – The maturity of the ECB securities portfolio and new bond issuance exchange

L1-HQLA mainly for L1-HQLA – The maturity of TLTROs does not reduce the liquidity transformation

opportunity for banks as long as the full allotment procedure applies

• Any upward pressure on government bond yields following the end of QE gets partly dampened if banks compete to hold more bonds

• Funding rates may experience upward pressure if banks see less liquidity inflows and compete for deposits and issue more

• HQLA demand could spill over to ECB refinancing operations

ECB’s impact on HQLA supply and demand

7

ECB-PUBLIC

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Overview

8

1

2

3




ECB-PUBLIC

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www.ecb.europa.eu © 9

Notes: The sample period is 2013-2018, when new regulatory initiatives became relevant. The y-axis represents a stylised monetary policy corridor with MLF=1, MRO=0, DFR=-1. The vertical line indicates the excess liquidity level at which the expected market rate equals the MRO rate. Source: EMMI, ECB, ECB calculations.

Historic relation between EONIA and excess liquidity

A structural demand for excess liquidity may be present

ECB-PUBLIC

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Unsecured money market unlikely to recover owing to regulation

Money market turnover

Notes: Sample of 38 banks reporting in both the Euro Money Market Survey until Q2 2015 and under the Money Market Statistical Reporting from Q3 2016 onwards. Source: ECB.

Interbank cash lending and borrowing of 38 banks (quarterly total transaction volumes)

ECB-PUBLIC

0

5

10

15

20

25

30

35

40

45

2003

Q2

2004

Q2

2005

Q2

2006

Q2

2007

Q2

2008

Q2

2009

Q2

2010

Q2

2011

Q2

2012

Q2

2013

Q2

2014

Q2

2015

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

EUR

tn

OIS FX swaps Secured Unsecured

Rubric


A return of cash management driven repo, and rate spikes on reporting dates?

Secured money market rates and volumes in the presence of excess liquidity

Note: volumes as executed on the Brokertec and MTS platforms (top panel); RepoFunds index and STOXX GC Pooling ON index (bottom panel). Source: Bloomberg, Brokertec, ECB, MTS.

Short-term repo and excess liquidity conditions

ECB-PUBLIC

-

300

600

900

1,200

1,500

1,800

2,100

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

2013 2014 2015 2016 2017 2018

EUR

bn%Excess Liquidity (RHS) RepoFunds euro GC Pooling ECB deposit facility rate

0

50

100

150

200

250

300

350

2013 2014 2015 2016 2017 2018

EUR

bn

General Collateral Specific collateral

Cash driven repo rate

Collateral driven repo rate

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Overview

12

1

2

3




ECB-PUBLIC

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0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

MP3 12 MP11 14 MP4 17 MP5 17 MP6 17 MP7 17 MP8 17 MP1 18 MP2 18

EUR

bn

Others

ES

IT

AT

BE

LU

FI

NL

FR

DE

Reserve reduction will concentrate on certain euro area countries

Excess liquidity concentration across euro area countries

13

Excess liquidity held with national central banks (averages of reserve maintenance periods)

ECB-PUBLIC

Notes: excess liquidity covers recourse to the deposit facility and current account holdings in excess of minimum reserve requirements. See also Baldo et al. (2017): “The distribution of excess liquidity in the euro area”, ECB Occasional Paper, 200. Source: ECB.

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Excess liquidity driven deposit flows to become less dominant

14

Flows in the unsecured interbank market (direction, volume and pricing) ECB-PUBLIC

→ Excess liquidity holding countries → Non excess liquidity holding countries → Non euro area

Notes: the lines represent clockwise from-to flows, with the thickness representing average volume and the colour the destination country group. The size of nodes represents the net inflow into a banking system, with blue nodes indicating excess liquidity holding banking systems. Sample period: July 2016 to April 2018. Source: ECB, ECB calculations.

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Repo rates against various euro area collateral

Note: repo rates against German, French, Italian and Spanish collateral. Source: Brokertec, ECB, MTS.

Repo rate dispersion is likely to decline, leaving only differences in perceived creditworthiness

ECB-PUBLIC

-

300

600

900

1,200

1,500

1,800

2,100

2,400

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

2013 2014 2015 2016 2017 2018

EUR

bn%Excess Liquidity (RHS) DE FR IT ES ECB deposit facility rate

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Repo spreads against size of monetary policy portfolio and excess liquidity

Note: spread on repo against French, German and Italian non general collateral below the ECB’s deposit facility rate (DFR) versus the size of the asset purchase programme. Source: Brokertec, ECB, MTS and ECB calculations.

Repo rate dispersion contained owing to sec lending and adjusted bank behaviour

ECB-PUBLIC

-

500

1,000

1,500

2,000

2,500

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

250 750 1,250 1,750 2,250 2,750

Exce

ss L

iqui

dity

EUR

bn

Repo

Spr

ead

to D

FR (p

p)

Monetary Policy Portfolio EUR bn

Excess liquidity (rhs) DE non-GC FR non-GC IT non-GC

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Conclusion

• LCR over-compliance and the large stock of HQL securities predict limited frictions from the reduction in reserves

• Euro area banks will want to replace a contained but sizeable share of the reserves with bonds, implying a redistribution of HQLA and competition with non-banks.

• The demand for HQLA will interact with other parts of the monetary policy framework: possible spillover to refinancing operations, dependence on the size of the corridor, etc.

• Cash driven market activity is expected to rise, but unlikely that the unsecured interbank segment reaches pre-crisis levels.

• The concentration of reserves in certain countries may involve frictions, but effects are likely to remain contained post-crisis.

17

ECB-PUBLIC

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Background

Impact of Reductions in Reserves 18

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EONIA und ESTER - Volumes

(15 March 2017 – 31 July 2018; EUR billion )

Quellen: ECB and EMMI.

0

5

10

15

20

25

30

35

40

45

50

03/2017 05/2017 07/2017 09/2017 11/2017 01/2018 03/2018 05/2018 07/2018

EONIAPre-ESTER

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EONIA und ESTER – Spread and volatility

(15 March 2017 – 31 July 2018; per cent)

Quellen: ECB and EMMI.

-0.50

-0.45

-0.40

-0.35

-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

03/2017 07/2017 11/2017 04/2018

EONIAPre-ESTER

impact of reductions in reserves in the euro area€¦ · 2015-q1 2015-q2 2015-q3 2015-q4 2016-q1...

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