José Manuel González-Páramo: The ECB’s monetary policy during the crisis Closing speech by Mr José Manuel González-Páramo, Member of the Executive Board of the European Central Bank, at the Tenth Economic Policy Conference, Málaga, 21 October 2011. They also required the courage to face the inevitable criticism and engage with those who disagreed. What does this mean for the ECB in practice? To do this, we use the anonymous data provided by cookies. And the result would have been unnecessary hardship and suffering. Governments need to address the structural problems in their economies. And fairness also matters between generations. One of the innovative responses of our operational framework was the launch of our first Covered Bond Purchase Programme (CBPP1) in July 2009. It is to do what we can to limit their hardship. Catholic Social Doctrine makes absolutely clear that subsidiarity has to be paired with support. We need reforms that make doing business easier. The term “Automatic stabiliser” is usually applied to features of tax and transfer systems which tend to offset fluctuations in economic activity without the need for discretionary fiscal interventions by policymakers. Thus, while formal ‘forward guidance’ came only on 16 Decemb… There is no real equity through debt. We need to reinvigorate our social models by reforming our economies. Unlike the Fed, which had room to cut interest rates in response to the COVID-19 crisis, the ECB’s policy rate has been negative since 2014, when it was cut below zero to nudge banks to lend, rather than leaving deposits at the central bank. It ensures that we would only ever intervene in situations where fiscal discipline is firmly ensured. But what binds these together is trust. This solution will require the decoupling of banks’ fortunes from the funding situation of their sovereign. It is important to note that with its contribution to the monetary policy transmission mechanism, the SMP, in conjunction with the SMP-liquidity absorbing operations, is oriented towards price-stability. The answer to both these questions is a categorical “yes”. In this context, it presents the 'standard' measures in operation since 1999, as well as the main 'non-standard' measures introduced during the global financial crisis and the European sovereign debt crisis. At its meeting of 6th October, the Governing Council therefore decided to announce a second covered-bond purchase programme, CBPP2, within which €40 billion will be bought within the year starting November 2011. Stable prices support the weakest members of our societies – including pensioners and the unemployed – who depend on fixed incomes to live. The liquidity we provide to banks is used in the markets where banks lend to each other. Let me take them in turn. Furthermore, banks and other financial market participants, pass on money market interest rates to households and businesses, thereby affecting economic activity. Although we characterise this tool as “standard”, the financial crisis did require significant and aggressive cuts in interest rates: following the collapse of Lehman Brothers the ECB lowered, within a period of seven months, the refinancing rate by 325 basis points from 4.25% to a historic low of 1%. Underlying the crisis is thus a significant fragility of security markets, which calls into question the efficiency of financial markets more generally. Our most significant non-standard measure is without doubt the fixed-rate full allotment policy, which provides central bank intermediation where the interbank market fails and which operates in a very quiet manner. Central bank intermediation as automatic stabiliser. And we extended the maturity of our operations, going up to 3 years. The risk of sub-prime mortgages and the financial products built around them was grossly underestimated. During the second conference panel regarding ECB's instruments and the lessons from the financial crisis and the debt crisis chaired by Pablo Hernández de Cos, Governor of Banco de España, Lucrezia Reichlin of the London Business School pointed out that the credibility of inflation targeting was crucial. In the US, the one unexpected announcement did trigger a strong response; but even the anticipated rate cuts were viewed favourably, especially if they were 50 basis points (0.5%) or larger. Researchers at the Chicago Fed find that anticipated policy actions have positive stimulative effects if they signal deviation from historical policy (D’Amico and King 2015, pp. The economic effects will presumably reach far beyond the current year. The fact that sovereign bond markets in some euro area jurisdictions were becoming increasingly dysfunctional by May 2010, and considerations over the crucial role that this segment plays as a basic pillar of our financial system, motivated the launch of one of our most important non-conventional monetary policies to date: the Securities Markets Programme (SMP). The European sovereign debt crisis, which peaked in the 2010-12 period, is no exception. Euro area GDP is currently lower than it was in 2008. During this crisis, the demand for cash has become less predictable. Reproduction is permitted provided that the source is acknowledged. They were the result of market failure: a situation where investors seem to act rationally, but collectively they create destructive outcomes. When the monetary policy transmission mechanism functions, then decisions on the official interest rate, in the case of the ECB the minimum bid rate in main refinancing operations, appropriately affect inflation and economic activity through various channels, in line with the established standard empirical relationships. It preserves the purchasing power of our money and the value of our savings. 10 The selection of these event dummies is guided by common choices in the literature … Dig deeper into the ECB’s activities and discover key topics in simple words and through multimedia. Moving on from interbank markets let me now turn to the covered and sovereign bond markets. policy of the European Central Bank (ECB). Indeed, if governments respond appropriately to risks to financial stability and banks reinforce and efficiently restructure their balance sheets, the ECB may have to be less concerned with non-standard measures to restore the monetary policy transmission mechanism. the ECB’s inception in 1999; when the financialcrisis hit, in the years 2007–9; and during the post–sovereign debt crisis, low-inflationrecov-ery period, 2013–17. To this end, the ECB has temporarily eased the requirements regarding the collateral that banks provide when borrowing. The ECB’s monetary policy stance during the financial crisis minimum bid rate on the main refi nancing operations and the interest rates on the marginal lending facility and the deposit facility, which form a corridor around the minimum bid rate. What is the ECB doing to support the euro area economy? Our common currency exists not as an end, but as a means. Thus, the SMP is very much an innovative tool with an orthodox stability-oriented purpose. Countries that were fundamentally adjusting were being driven to the wall by panic. Monetary policy therefore has a primary importance for the liberal order.” [2]. This column reviews empirical evidence on how monetary policy affects bank stability, focusing on unconventional monetary policy measures deployed by the ECB during the crisis. In this way we can safeguard our primary capital, which is the human person in his or her integrity, [1]M. Draghi “Non c’è vero sviluppo senza etica” - Articolo per "L’Osservatore Romano" del 9 luglio 2009: “La crisi attuale conferma la necessità di un rapporto fra etica ed economia, mostra la fragilità di un modello prono a eccessi che ne hanno determinato il fallimento. The rate was kept at this historically low level until April 2011 when the Governing Council decided to increase the rate by 25 basis points. Discover euro banknotes and their security features and find out more about the euro. The ECB in the COVID-19 Crisis: Whatever it Takes, Within its Mandate Policy Department for Economic, Scientific and Quality of Life Policies . This is why I say that reforms that make economies work better also make them fairer. The Euro is a project without precedent and under Mario Draghi the ECB was a leading actor in world monetary policy. So what we cannot afford now is to stay where we are. Having a framework that already accepted a wide range of collateral before the crisis, which in the case of the euro area is due to the original need to accommodate a very diverse financial system, has served as a key crisis-mitigation tool. In sum, the ECB has acted, and will continue to act, to fulfil its mandate. Trust that each will put its own house in order – even if it is politically difficult. It argues that the US approach has been much more aggressive and proactive. Although this policy can moderate the symptoms of the crisis, it cannot provide the lasting solution to this crisis. For instance, the eligibility of foreign-currency ABS was revoked on the first of January of this year and ABS rating requirements have been tightened more generally. As Walter Eucken, the philosophical father of ordoliberalism, noted, “all efforts to establish a liberal order are futile unless a certain monetary stability is guaranteed. Your own national experience is at once a powerful reminder and steadfast obligation for the central bank. Through the stabilising effect of our measures, the current course of the ECB’s monetary policy has decisively contributed to effectively preventing the fragmentation of the euro area, alleviating the financial consequences of the crisis and, by doing so, preserving jobs and investment. SPEECH. However, with the recent intensification of the sovereign debt crisis, covered bond markets have again come under significant pressure. Let me start with the interbank market. Look at press releases, speeches and interviews and filter them by date, speaker or activity. Similarly, at its most recent meeting the Governing Council decided to keep the main refinancing rate unchanged, while, firstly, expanding our non-standard measures by re-introducing LTROs with 12-months and now even 13-months maturity, and, secondly, announcing a second covered bond purchase programme. The CBPP was announced in May 2009 and € 60 billion of covered bonds were purchased from July 2009 to July 2010. As money flows out of stressed countries and into safe-haven countries like Germany, it pushes up interest rates in the stressed countries, and pushes down interest rates here. The economic health of the countries around you affects us here and now. This paper examines the ECB’s policies since 2008 to argue that the Eurozone crisis is (also) a crisis of central banking. Therefore, there can be no question of trading off price stability against financial stability. The last time I had the opportunity to talk about these issues in Malaga was, when I had the honour of receiving the title of Doctor Honoris Causa from this prestigious university in June. The aim of this calibration is to equalise the probability of banks being either short or long in central bank liquidity on the last day of the reserve maintenance period. There are clear limits to what monetary policy can and should aim to achieve. The sub-prime crisis made itself felt in interbank markets at the beginning of August 2007 when overnight rates started trading at unusually high spreads to the MRO rate. EU INSTITUTIONS. Like other central banks in advanced economies, the ECB introduced unconventional monetary policy instruments and took over responsibilities over banking supervision in the euro area. Falling values of sovereign bond portfolios also affect banks’ balance sheets, and reduce, through the liquidity channel the value of government bonds as collateral. Against the background of our objectives of price-stability and the monetary policy transmission mechanism, let me now turn to the origins of the financial crisis. As a result, our low interest rates have simply not been getting through to people in some parts of the euro area. Not Karl, but Reinhard. The fixed-rate full allotment policy has been complemented by 6-month and 12-month operations. The ECB’s Monetary Policy Response to the COVID-19 Crisis (updated 25 September 2020) The European Central Bank’s (ECB’s) Governing Council took the main decisions on monetary policy measures to address the economic fallout of the COVID -19 pandemic during its regular meetings on 12 March 2020, Un modello in cui gli operatori considerano lecita ogni mossa, in cui si crede ciecamente nella capacità del mercato di autoregolamentarsi, in cui divengono comuni gravi malversazioni, in cui i regolatori dei mercati sono deboli o prede dei regolati, in cui i compensi degli alti dirigenti d'impresa sono ai più eticamente intollerabili, non può essere un modello per la crescita del mondo.”, [2]Walter Eucken, (1952) “Grundsätze der Wirtschaftspolitik”, p. 265: “Alle Bemühungen, eine Wettbewerbsordnung zu verwirklichen, sind umsonst, solange eine gewisse Stabilität des Geldwertes nicht gesichert ist. This means that actions by the ECB that protect the euro area against such outcomes – like the OMTs – also reduce hypothetical risks for German taxpayers. So these are the challenges facing European policy-makers today: how do we recreate confidence in the capacity of our economies to grow and generate prosperity so that they can ultimately serve the people? We are always working to improve this website for our users. Learn more about how we use cookies, We are always working to improve this website for our users. Those were difficult and existential decisions. They were paralysing the economy, and ultimately threatening price stability. Discover more about working at the ECB and apply for vacancies. Among them was an emphasis on ethical concerns in the economic relationships of our globalised world. The main aspects of the Eurosystem’s collateral framework are the following: that we accept a very broad range of eligible assets; that a broad range of counterparties can participate in our refinancing operations; that the same type of collateral is accepted in all refinancing operations; and that we have common eligibility criteria across the euro area, with loss-sharing in case of a counterparty default. While the ECB is bound to the primary objective of price-stability, it was left to the ECB to define price stability. In response to the segmentation of interbank markets, the ECB adopted several measures which essentially replace the missing intermediation in the interbank market by increasing intermediation through the central bank: first, the fixed-rate full allotment policy; second, LTROs with 6-month and 12-month maturity; third: foreign currency operations; fourth: a further broadening of the collateral framework. As laid down by the Treaty, there is a lexicographic ordering of objectives: price stability comes first: if this is granted, then the ECB may contribute to financial stability. Then the need for adopting non-standard measures would disappear. The monetary policy transmission mechanism. Let me conclude by returning to the theme of Cardinal Reinhard Marx – that the economy should be in the service of humanity. He is currently BBVA’s Executive Director. This can happen, firstly, via the price channel, as the role of the “risk-free rate” as a pricing benchmark is distorted. During the so-called “great moderation” - growth was steady, inflation low, and the slicing, dicing and distributing of risk had supposedly made financial markets more efficient and resilient – but what had in fact occurred was that risk had been mispriced. The answer is yes. It is also important to understand that our measures are designed not only to help the people in countries under stress. Second, in both cases the nature of the crisis was financial and it was produced by a fall in During the “fireside chat”, Lagarde gave little away about the direction of monetary policy. But it is a fallacy to make a mechanical connection between the creation of central bank liquidity and a rise in the money supply. As a result, banks can temporarily use more assets as collateral. The fixed-rate full allotment policy is probably the most significant non-standard measure the ECB is implementing. The terrible economic hardship in some parts of the euro area is testament to this. In April, the demand for cash fell, and in many countries it is now below normal levels. It shows that countries are ready and willing to be full members of the community. Almost 19 million people are unemployed – more than the population of the Netherlands. The ECB has been performing the one role it can in the crisis which the FT describes below. With regard to the third market segment which I would like to discuss, sovereign bonds, we can distinguish at least three ways in which they affect monetary policy transmission. Interdependence is not just a catchword. To do this, we use the anonymous data provided by cookies. As befits this setting, I would like to begin my remarks by noting the momentous nature of the current period for the Catholic Church, on the eve of the last day of the pontificate of Benedict XVI. European Central Bank Photo: AFP. I just returned from the Spanish Parliament in Madrid – and the concerns expressed there are very different from what I hear in Germany. First, the ECB has a stabilising role in the economy. The Eurozone crisis and its aftershocks have forced the ECB to move into uncharted territory. Prior to the crisis, macroeconomic models largely neglected the role of banks in the transmission of monetary policy, while empirical analyses were beset by weak identification strategies. So far investors have not added to the clamour — the cost of new debt remains low as the ECB buys most of the extra bonds sold, so many countries are able to borrow for … He experienced part of this process firsthand as a member of the ECB Executive Board and Governing Council from 2004 to 2012. Learn more about how we use cookies, We are always working to improve this website for our users. Financial stability is a responsibility of governments, while our responsibility is price-stability. But we are fully aware of the human dimension that lies behind it. A further response to the sovereign debt crisis relating to changes in our collateral framework has been to suspend the application of the minimum credit rating threshold for outstanding and new marketable debt instruments issued or guaranteed by the Greek, Irish and Portuguese governments, all of which are implementing EU and IMF programmes. Especially important is the possibility to increase the liquidity of assets and counterparties in times of stress. Using a tool created during the global financial crisis, the ECB can exchange euros for foreign currencies and lend those currencies to banks in the euro area. The Eurosystem then steers short-term market interest rates within this corridor, and normally Let’s start by first looking at what is often referred to as conventional monetary policy. And this path – building a stronger union based on mutual trust – is the way to answer that question for Europe. Isabel Schnabel: The ECB’s monetary policy during the coronavirus crisis – necessary, suitable and proportionate . In light of recent developments, swift recapitalisations of banks in a coordinated fashion will prove crucial. They are providing generous financial assistance on condition that underlying problems are fixed. In a sense, the “social question” of the 19th century, which inspired the Catholic Social Doctrine, has re-emerged – but today it transcends national borders: what is the right framework for reconciling free enterprise and individual profit motives with concerns for the common good and solidarity with the weak? Author: Grégory CLAEYS . We are committed to preserving the integrity of our currency, in the interests of all people of the euro area. For this reason, it is wrong to claim that countries are undertaking reforms only to please the markets or to satisfy the demands of technocrats in Brussels, Frankfurt or Washington. Thus, a falling demand for liquidity can be seen as a sign of normalisation. But what if countries cannot succeed on their own? We act to preserve price stability. Discover euro banknotes and their security features and find out more about the euro. Reproduction is permitted provided that the source is acknowledged. In one country in the euro area, more than fifty percent of young people cannot currently find jobs. The root cause of the current crisis, however, lies within the shores of the euro area. To this end, the affected countries must improve their fiscal adjustments and implement structural measures aimed at promoting growth. And in that sense, it also echoes a central tenet of Catholic Social Doctrine. It transcends borders. Progress in implementing economic reforms has been extraordinary. But our answer – both to those who want us to do less and to those who want us to do more – is the same: we will preserve price stability. This was complemented by another rate increase to the current level of 1.5%, which the Governing Council decided to maintain at its last meeting of 6th October. Indeed, price stability is a necessary condition for financial stability and thus the best contribution monetary policy can make to financial stability. Let me briefly conclude by highlighting that the segmentation of interbank markets is a reflection of the segmentation of sovereign bond markets and of the debt crisis which afflicts some euro area jurisdictions. These operations have been instrumental following the collapse of Lehman, while during the course of 2010 demand in these operations petered out. The invisible hand of the market, if only left unconstrained, would eventually generate better outcomes for all. In March 2020, the ECB published a report on “Financial Integration and Structures in the Euro Area”. Certainly, countries in Europe are already doing a lot to help each other. As Nobel Prize winning economist Amartya Sen has reminded us, our “instrumental objectives – like the single market and monetary union – should not overshadow our social commitment to the well-being and basic freedoms of the people.” [4]. By contrast, the Eurosystem only had to make relatively minor adjustments to its collateral framework. The fixed rate full allotment policy has proven a very efficient way of offsetting liquidity risk in the market by ensuring banks’ continued access to liquidity. In terms of our decision-making we follow a separation principle. Find out how the ECB promotes safe and efficient payment and settlement systems, and helps to integrate the infrastructure for European markets. In addition to this, excessive volatility of bond prices can also force investors to sell-off their bond holdings and make it more difficult for market makers to do their job. It prevents people from playing a full and meaningful part in society. Finally, the analysis aims to describe the influence of current economic trends on monetary policy and explain the most recent measures that have been taken by the ECB. If banks’, following appropriate policy actions on the above mentioned fronts, are no longer mistrusted because of their holdings of sovereign debt, the segmentation of money markets will decrease significantly. And we have designed the OMTs so that these decisions could never be dominated by fiscal policies. And these reforms should aim not only to create more growth and jobs, but also to make society fairer. And caring for the welfare of our neighbours is not only an ethical principle of the Christian faith: it also makes eminent economic sense. But in my view, once trust is established, we should go further still. They are doing it for their own benefit. We cannot clean up struggling banks. PE 648.811 – May 2020 EN IN-DEPTH ANALYSIS Requested by the ECON committee Monetary Dialogue Papers, June 2020 If liquidity does not circulate, then the appropriate liquidity supply is very difficult to calibrate. 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