Part 2
The quantitativ start (bond market) Anleihemarkt 250000 Mio DM 200000 150000 100000 50000 0 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 Bankschuldverschreibungen Industrieobligationen Anleihen der öffentlichen Hand Dr. Martin Pontzen Technical Centralbank Cooperation Page 2
Baby-Bonds Special pay back procedure All bonds are paid but in a lottery Benefits: Change of a very early payment Disadvantage: High risk for calculation Dr. Martin Pontzen Technical Centralbank Cooperation Page 3
Money Market Policy Characteristics of instrument of monetary operations: Voluntarily Co-operation with partners Market prices Part of market transactions Operation through inducement /persuasion and not by force Exception: Minimum Reserves Dr. Martin Pontzen Technical Centralbank Cooperation Page 4
Money Market Policy Instruments of monetary operations: Open market operations: Important role in monetary policy of the Euro-system, steering interest rates, managing liquidity situation in the market, signalling direction of monetary policy Minimum Reserves: Stabilisation of money market interest rates by creating (or enlarging) structural liquidity shortage Standing facilities: Provide and absorb overnight liquidity, to satisfy temporary liquidity needs Dr. Martin Pontzen Technical Centralbank Cooperation Page 5
Money Market Policy Open market operations: Instruments outright transactions: sale or purchase of eligible assets outright on the market, use for fine tuning and structural purposes full transfer of ownership, settlement and price terms in accordance of the market conventions Issuance of debt certificates: below nominal value (discounted to date of maturity), interest rate calculated on bases of day-count convention actual/360 Foreign exchange swaps: Purchase (or sale) of Euro spot against a foreign currency and at the same time sale- (or purchase-) contract as a forward transaction at specified date Dr. Martin Pontzen Technical Centralbank Cooperation Page 6
Money Market Policy Open market operations: Instruments Collection of fixed term deposits: acceptance of remunerated fixed terms deposits with a fixed interest rate to absorb liquidity and most important Reverse transactions: sale or purchase of eligible assets under repurchase agreements, interest as difference between purchase and repurchase price, calculated on bases of day-count convention actual/360 Dr. Martin Pontzen Technical Centralbank Cooperation Page 7
Money Market Policy Reverse transactions: Operations Main refinancing operations: most important for monetary policy Particularities: - liquidity providing operation - regularly executed once per week, maturity one week - Standard tender - Tier 1 / Tier 2 assets (marketable and not marketable securities accepted as eligible assets) Longer Term Refinancing Operations: Particularities: - liquidity providing operation - regularly executed once per month, maturity three month - Standard tender Fine-Tuning Reverse Operations: Particularities: - liquidity providing and absorbing operation - Frequency and maturity not standardised - Quick Tender Dr. Martin Pontzen Technical Centralbank Cooperation Page 8
Money Market Policy Standing Facilities Marginal lending facility: to obtain overnight liquidity, pre specified interest rate, against eligible assets (Tier 1 and Tier 2) Deposit facility: to deposit overnight liquidity pre specified interest rate, Deposit to be cleared during next working day until 18:00 hrs (CET) Dr. Martin Pontzen Technical Centralbank Cooperation Page 9
Money Market Policy Minimum Reserves All credit institutions within the Euro-system have to hold minimum reserves on accounts of the National Central Bank Amount of Minimum reserve to be held is determined in relation to the average of the counterparts accounts Purpose: Stabilisation of money market interest rates, by smoothing the effects of liquidity fluctuations Creation or enlargement of a structural liquidity shortage working balances for payment purposes Dr. Martin Pontzen Technical Centralbank Cooperation Page 10
Capital Market Policy Capital Market Policy for a Central Bank is creating policy for the Financial Market Regulatory Framework of a Financial Market (Ordnungspolitk) Evolution of a Financial Market Stability issues of the Financial Market Dr. Martin Pontzen Technical Centralbank Cooperation Page 11
Capital Market Policy Tasks for a Central Bank regarding Capital Market Policy Creation and Setting of the Framework for Financial Markets: - Quality issue of financial institutions: Banking Supervision - Analysis of market developments: interest rates (domestic and international), spreads between interest rates, impact of accounting standards Maintaining the stability of financial markets - comparison of financial sectors (stock exchange indexes, asset pricing, defaults, breaches etc.) - monitoring and controlling of major financial institutions Dr. Martin Pontzen Technical Centralbank Cooperation Page 12
Capital Market Policy Further Capital Market Policy is Debt Management for Government Work split between Bundesbank and Federal Finance Agency (Finanzagentur) Research, decisions on Market and Price management Bundesbank is fiscal agent for issuance of Federal Government Bonds to execute issues of debt management on behalf of Federal Finance Agency Conducting price management for Federal Government Bonds on behalf of Federal Finance Agency Dr. Martin Pontzen Technical Centralbank Cooperation Page 13
Capital Market Policy Involvement of the Deutsche Bundesbank Publication of the issue plans (quarterly) of the principal issuer at the Federal Government level on behalf of Federal Finance Agency Announcement of new issues of the market Secondary market: - Daily price management of outstanding bond according to guidelines of Federal Finance Agency - Guarantee of market liquidity and fair pricing Dr. Martin Pontzen Technical Centralbank Cooperation Page 14
Main Functions Bank of the Banks Services and Supervision State Bank (and no credit!) Target: Financial Market Stability Dr. Martin Pontzen Technical Centralbank Cooperation Page 15
Yield curves of German Bunds vs. German, French and Irish covered bonds as of 14 June 2007 - before the start of the US housing crisis Yield (%) 6,0 5,8 5,6 5,4 5,2 5,0 4,8 4,6 4,4 4,2 4,0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Bunds Pfandbriefe Obligations Foncieres Irish ACS Maturity (years) Dr. Martin Pontzen Technical Centralbank Cooperation Page 16
Federal Ministry of Finance Dr. Martin Pontzen Technical Centralbank Cooperation Page 17