ECB steps up liquidity support with new operations
04 May 2020 Frankfurt
Image: WillyamBradberry/Shutterstock.com
The European Central Bank (ECB) is set to conduct a series of seven additional longer-term refinancing operations, called pandemic emergency longer-term refinancing operations (PELTROs).
These operations, the bank says, will provide liquidity support to the euro area financial system and contribute to preserving the smooth functioning of money markets by providing an effective backstop after the expiry of the bridge longer-term refinancing operations that have been conducted since March.
The first operation will be announced on 19 May, allotted on 20 May and settled on 21 May.
The PELTROs will be conducted as fixed-rate tender procedures with full allotment.
Operations allotted on a near-monthly basis will mature in Q3 of 2021.
The interest rate will be 25 bps below the average rate applied in the Eurosystem’s main refinancing operations (currently 0 percent) over the life of the respective PELTRO.
Counterparties participating in PELTROs will be able to benefit from the collateral easing measures than came in on 23 April and will remain in place until the end of September 2021.
ECB says the operations provide longer-term funding to counterparties with decreasing tenors, starting with a tenor of 16 months in the first operation and ending with a tenor of 8 months in the last operation.
The new operations appear to come as an alternative to expanding its €750 billion
Pandemic Emergency Purchase Programme which the ECB has been resistant to inflate further.
However, the PELTRO option has its own drawbacks.
Andrew Hill, senior director at the International Capital Market Association explains that while the PELTROs should help to support short-term financing for the peripheries, it does not quite deliver when it comes to settling nerves about longer-term borrowing costs and sustainability, where an expansion of the PEPP would have been helpful.
“We should not forget that the ECB potentially still has the Outright Monetary Transactions (OMT) ‘bazooka’ in its arsenal, which allows it to do whatever it takes to support the eurozone,” Hill explains. “While it will be reluctant to reach for it, and activating it may not be that straightforward, the longer the EU dawdles on its projected Recovery Fund, the more necessary it may become.”
The new operations are only the latest adjustment to come from the control room of the ECB, where various knobs and levels have been activities as part of the central bank’s efforts to keep liquidity steady amid the COVID-19 disruption.
In April it the ECB offered a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements.
In addition to smoothing procyclicality, the ECB says this move aims to maintain banks’ ability to provide market liquidity and to continue market-making activities.
The ECB has also increased its collaboration with its counterparts around the world through the opening of new swap lines to further ease the movement of liquidity.
These operations, the bank says, will provide liquidity support to the euro area financial system and contribute to preserving the smooth functioning of money markets by providing an effective backstop after the expiry of the bridge longer-term refinancing operations that have been conducted since March.
The first operation will be announced on 19 May, allotted on 20 May and settled on 21 May.
The PELTROs will be conducted as fixed-rate tender procedures with full allotment.
Operations allotted on a near-monthly basis will mature in Q3 of 2021.
The interest rate will be 25 bps below the average rate applied in the Eurosystem’s main refinancing operations (currently 0 percent) over the life of the respective PELTRO.
Counterparties participating in PELTROs will be able to benefit from the collateral easing measures than came in on 23 April and will remain in place until the end of September 2021.
ECB says the operations provide longer-term funding to counterparties with decreasing tenors, starting with a tenor of 16 months in the first operation and ending with a tenor of 8 months in the last operation.
The new operations appear to come as an alternative to expanding its €750 billion
Pandemic Emergency Purchase Programme which the ECB has been resistant to inflate further.
However, the PELTRO option has its own drawbacks.
Andrew Hill, senior director at the International Capital Market Association explains that while the PELTROs should help to support short-term financing for the peripheries, it does not quite deliver when it comes to settling nerves about longer-term borrowing costs and sustainability, where an expansion of the PEPP would have been helpful.
“We should not forget that the ECB potentially still has the Outright Monetary Transactions (OMT) ‘bazooka’ in its arsenal, which allows it to do whatever it takes to support the eurozone,” Hill explains. “While it will be reluctant to reach for it, and activating it may not be that straightforward, the longer the EU dawdles on its projected Recovery Fund, the more necessary it may become.”
The new operations are only the latest adjustment to come from the control room of the ECB, where various knobs and levels have been activities as part of the central bank’s efforts to keep liquidity steady amid the COVID-19 disruption.
In April it the ECB offered a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements.
In addition to smoothing procyclicality, the ECB says this move aims to maintain banks’ ability to provide market liquidity and to continue market-making activities.
The ECB has also increased its collaboration with its counterparts around the world through the opening of new swap lines to further ease the movement of liquidity.
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