Nonstandard Monetary Policy Measures and Central Bank Balance Sheet Risks Franziska Schobert
Agenda 1. Overview on crisis-related developments in the euro area 2. Impact of crisis-related measures on central bank balance sheet risks 3. The meaning of large bank reserves 4. Conclusions 2
Key policy rates in the Eurosystem % 5.50 500 5.00 4.50 marginal lending rate MRO marginal allotment rate 1) MRO fixed rate 1) 4.00 3.50 3.00 2.50 MRO minimum bid rate 1) deposit rate 2.00 150 1.50 1.00 0.50 1) Since 15 October 2008 a fixed interest rate is applied in main refinancing operations. EONIA 0.00 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 3
Steering of money market rates in the euro area 5.5 % 5.0 4.5 4.0 3.5 3.0 EONIA main refinancing rate / MRO minimum bid rate 3 month EURIBOR deposit rate 25 2.5 2.0 Fixed rate full allotment tenders 1.5 1.0 0.5 0.0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 4
Tensions in financial markets of the euro area Money markets Sovereign bond markets 100 80 Spread in bps: Euribor1W Eurepo1W 60 40 20 0-20 02 03 04 05 06 07 08 09 10 11 12 2,000 1,600 1,200 800 400 0 yield spread in BP vs. 10y-Bunds Source: Reuters, own calculations Convergence Euro-"Honeymoon" Divergence Greece (right-hand scale) Ireland Portugal Spain Italy EMU 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 4,000 3,500 3,000 2,500 2,000 1,500 1000 1,000 500 0 5
Nonstandard monetary policy measures of the Eurosystem A long term perspective million 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0-200,000 000-400,000-600,000-800,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Liquidity-providing fine-tuning operations Marginal lending facility Supplementary longer-term refinancing operations Liquidity-absorbing fine-tuning operations CBPP + SMP Main refinancing operations Longer-term refinancing operations Deposit facility 6
Nonstandard monetary policy measures of the Eurosystem A closer view EUR bn 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100-100 -200-300 -400-500 -600 Marginal lending facility Other securities held for monetary policy purposes (CBPP II) Securities markets programme (SMP) Covered bond purchase programme (CBPP) -700 Liquidity providing fine-tuning operations Main refinancing operations -800 Supplementary longer-term refinancing operations Longer-term refinancing operations -900 Deposit facility Liquidity absorbing fine-tuning operations -1000 Liquidity needs (AF+MRR) -1100 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 7
Is lean beautiful? Gros and Schobert (1999) Excess Foreign Exchange Reserves and Overcapitalisation in the Eurosystem (CEPS Working Document No. 128), Brussels Centre for European Policy Studies 8
Normal Structures of Central Bank Balance Sheets (?) In billions of euro 1: Banknotes in circulation Eurosystem Federal Reserve Bank of Japan 1.1.1999 30.12.1998 31.12.1997 31.12.1998 342 421 381 422 2: Bank 87 16 24 33 reserves 3: Other 268 85 98 237 4: Total 697 522 503 692 (1)/(4) ( ) 0.49* 0.81 0.76 0.61 * Banco de Portugal: 0.25; Deutsche Bundesbank: 0.61 Seite 9
Banknotes in circulation/ total assets 10 Eurosystem Federal Reserve 8 Bank of England 6 Swiss National Bank 2 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 10
Crisis-related evolution of central bank balance sheets Jan. 2007=1 Eurosystem 4 Federal Reserve Bank of England Swiss National Bank 3 2 1 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 11
Share of monetary policy lending to total assets 6 Eurosystem 10 Bank of England 5 Lending in EUR + USD / total assets 8 ofwhich: Lending in GBP/ total assets Lending in GBP and USD / total assets 6 3 of which: Lending in EUR / total assets 2 1 of which: Longer term in EUR / total assets 2 of which: Longer term in GBP / total assets Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 6 Federal Reserve 6 Swiss National Bank 5 5 Lending in USD / total assets Claims from CHF + USD repo transactions / total assets 3 3 2 2 of which: Claims from CHF repo transactions/ total assets 1 1 of which: TAF / total assets Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 12
Share of monetary policy outright portfolios to total assets 5 Eurosystem 10 Bank of England 8 3 6 Quantity of assets purchased by the creation of central bank reserves / total assets 2 1 Securities held for monetary policy ypurposes p / total assets 2 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 10 Federal Reserve 10 Swiss National Bank 8 8 6 6 Foreign exchange reserves / total assets of which: Federal Agency Obligations & MBS / total assets 2 2 Securities held outright / total assets Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 13
Bank reserves held at major central banks Eurosystem* Federal Reserve Bank of England Swiss National Bank Jan 2007 EUR 176 bn USD 27 bn GBP 17 bn CHF 5 bn Mar 2012 EUR 880 bn USD 1,565 bn GBP 207 bn CHF 218 bn** end of period * includes recourse to the deposit facility;. ** average of last week in March 2012 14
Optimal level of bank reserves: Floor or corridor? Interest rate Modifications in the floor system: 1. Deposit rate equals target rate 2. Reserve supply is chosen so that it intersects the flat part of the demand curve Lending rate Target rate Target rate = Deposit rate Required Reserves Target supply in a corridor system Minimum target supply in a floor system Reserve Balances 15 Based on Keister, Martin and McAndrews (2008), p. 45, 51
Conclusions Extraordinary times justify exceptional steps However, balance sheet policies imply (1) additional financial risks, and (2) larger reserve balances, if left unmanaged, which raise important questions: What are the additional benefits? Could similar benefits be reaped by alternative measures outside the central bank balance sheet? What are the implications of large reserve balances? 16