Current challenges for the ECB
Benoît Cœuré
Member of the Executive Board
European Central Bank
Association des journalistes économiques et financiers
Paris, 5 April 2013
1
1
Conjunctural developments
2
Euro area real GDP and survey data
(A) quarter-on-quarter growth rate, contributions
(B) year-on-year growth rate, diffusion index, percentage balance)
Sources: Markit, DG-ECFIN and Eurostat.
Latest data: 2012Q4 for GDP, March 2013 for the ESI and the PMI.
3
Euro area divergence
Real GDP
Economic Sentiment Index
(index: 2009Q2 = 100)
(index: March 2009 = 100)
Sources: DG-ECFIN, Eurostat and ECB calculations.
Latest data: 2012Q4 for GDP, March 2013 for the ESI.
Note: Stressed countries refer to GR, ES, IE, IT, PT, CY & SI.
4
Developments in euro area labour markets
Euro area employment, PMI employment expectations and unemployment
(q-o-q % growth; index; % of labour force)
Sources: Eurostat and Markit.
Note:The PMI is expressed as deviations from 50 divided by 10.
Latest data: 2012Q4 for employment, February 2013 for unemployment and March 2013 for the PMI.
5
Latest euro area real GDP growth forecasts
(annual percentage change)
Date
2013
2014
2015
-0.9 - -0.1
0.0 - 2.0
-
ECB staff macroeconomic projections
07 March 2013
OECD
27 November 2012
-0.1
1.3
-
IMF
23 January 2013
-0.2
1.0
1.5
ECB Survey of Professional Forecasters
31 January 2013
0.0
1.1
1.6
European Commission
22 February 2013
-0.3
1.4
-
Euro Zone Barometer
11 March 2013
-0.1
1.2
1.6
Consensus Economics
14 March 2013
-0.3
1.0
1.6
6
HICP and HICP excluding food, energy and taxes
(annual percentage changes)
4.5
Mar 2013 MPE Range
HICP
HICP excluding food and energy
HICP excluding food, energy and taxes
4.5
4.0
4.0
3.5
3.5
3.0
Mar: 1.7%
3.0
2014
-1.0
2013
-1.0
2012
-0.5
2011
-0.5
2010
0.0
2009
0.0
2008
0.5
2007
0.5
2006
1.0
2005
1.0
2004
1.5
2003
1.5
2002
2.0
2001
2.0
2000
2.5
1999
2.5
Sources: Eurostat and ECB calculations.
Note: Latest observations: March 2013 for HICP and HICP excluding food and energy (Flash estimates). January 2013 for HICP excluding food, energy and taxes. Projection
ranges for 2013 and 2014 refer to the March 2013 MPE . Projections for HICP excluding energy, food and taxes are not available.
7
The price of deflation and inflation protection
remain below the 5-year average
Price of floor and caps (year-on-year) on euro area HICP inflation – 5Y maturity
Sources: Bloomberg. Latest observation: 03 April 13
Note: The market for inflation-linked options is relatively illiquid and often heavily influenced by specific demand and supply patterns. Developments
should therefore be interpreted with caution. The underlying instruments are for the inflation protection: year-on-year cap of 4% with 5 year maturity;
for deflation protection: year-on-year floor of 0% with 5 year maturity.
8
Latest euro area HICP forecasts
(annual percentage change)
Date
2013
2014
2015
1.2 - 2.0
0.6 - 2.0
-
ECB staff macroeconomic projections
07 March 2013
OECD
27 November 2012
1.6
1.2
-
IMF
23 January 2013
1.6
1.4
1.5
ECB Survey of Professional Forecasters
31 January 2013
1.8
1.8
1.9
European Commission
22 February 2013
1.8
1.5
-
Euro Zone Barometer
11 March 2013
1.8
1.7
1.9
Consensus Economics
14 March 2013
1.7
1.7
1.8
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The ECB monetary policy
10
Overview of the ECB’s monetary policy in the crisis
In exceptional circumstances, the ECB took exceptional monetary
policy measures, with a separation between:
1. Standard measures: Reduction in all key ECB interest rates
2. Non-standard measures: to support the effective
transmission of interest rate decisions to the wider euro area
economy, in a context of dysfunctions in the financial market
Price stability objective has retained primacy in all these measures
11
ECB’s interest rate decisions and implementation:
steering money market conditions
As a result of the monetary policy operations, the overnight
interest rates evolve in relation to the key ECB interest rates
deposit rate
main refinancing / minimum bid rate
overnight interest rate (EONIA)
marginal lending rate
6
5
4
3
2
1
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
Sources: ECB
Last observations: 2 April 2013.
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Overview of non-standard monetary policy actions
I. Measures to improve bank funding and liquidity conditions
• Fixed-rate full allotment mode in refinancing operations (since October 2008)
• Lengthening the maturity of the refinancing operations (1, 3, 6, 12 and 36 months)
• Extending the list of eligible collateral
• Liquidity provision directly in foreign currencies (USD and CHF)
• Reducing reserve requirements (from 2% to 1%)
II. Measures to provide depth and liquidity in malfunctioning markets
A. Covered bond markets
• Covered Bond Purchase Programmes (July 2009 - July 2010; Nov. 2011-Oct. 2012)
B. Sovereign bond markets
• Securities Markets Programme (May 2010 to 6 September 2012)
• Outright Monetary Transactions (modalities announced on 6 September 2012)
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How non-standard measures are reflected in the ECB’s
balance sheet…
Billion €
Eurosystem monetary policy operations in euro
1600
1400
1200
1000
800
600
400
200
0
-200
-400
-600
-800
-1000
-1200
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
main refinancing operations
1-maintenance period refinancing operations
3-month longer-term refinancing operations
6-month longer-term refinancing operations
12-month longer-term refinancing operations
CBPPs and SMP
fine tuning providing operations
3-year longer-term refinancing operations
fine tuning absorbing operations
net recourse to deposit facility
daily reserve surplus under zero deposit rate
liquidity needs (autonomous factors + reserve requirements)
Source: ECB.
Last observation: 2 April 2013.
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Relationship between EONIA and excess liquidity
1.4
EONIA - Deposit Rate spread
1.2
1
0.8
0.6
0.4
0.2
0
0
200
400
600
Excess liquidity (€ billions)
800
1000
Source: ECB.
Sample period: May 2009 to April 2013
15
Indicator of cost of borrowing for non-financial
corporations
Short-term
Long-term
(percentages per annum; three-month moving average;
March 2003 to January 2013)
(percentages per annum; three-month moving average;
March 2003 to January 2013)
euro area
Germany
euro area
Germany
France
Italy
France
Italy
Spain
The Netherlands
Spain
The Netherlands
8
8
6
6
4
4
2
2
0
2003
0
2003
2005
2007
2009
2011
Sources: ECB, ECB calculations.
Notes: The indicator is computed using lending rates on loans with a maturity of up to one
year and interest rates on overdrafts, aggregated on the basis of amounts outstanding. The
weight applied to lending rates on loans with a maturity of up to one year accounts for the
share of long-term loans issued at a floating rate.
2005
2007
2009
2011
Sources: ECB, ECB calculations.
Notes: Long-term lending rates on loans with a maturity of more than one year.
Aggregation is based on new business volumes.
16
Indicator of cost of borrowing for households
Short-term
Long-term
(percentages per annum; three-month moving average;
March 2003 to January 2013)
(percentages per annum; three-month moving average;
March 2003 to January 2013)
euro area
Germany
France
euro area
Germany
France
Italy
Spain
The Netherlands
Italy
Spain
The Netherlands
8
8
6
6
4
4
2
2
0
2003
2005
2007
2009
2011
Sources: ECB, ECB calculations.
Notes: Lending rate to households for house purchase, up to one year maturity.
Aggregation is based on new business volumes.
0
2003
2005
2007
2009
2011
Sources: ECB, ECB calculations.
Notes: Long-term lending rates on loans with a maturity of more than one year. Aggregation
is based on new business volumes.
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Risk control measures
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Risks in Eurosystem credit operations
• The risk management framework enables the central banks to
provide support to the economy by optimising the
relationship between policy efficiency and risk taking
• Risks are constantly monitored and assessed against available
financial buffers at the Eurosystem level
19
Non-standard monetary policy measures (purchases)
Monetary policy portfolios
SMP (as of 31 December 2012)
Outstanding amounts
Issuer country
Ireland
Greece
Spain
Italy
Portugal
Total
Nominal amount
Book value
(EUR billion)
(EUR billion)
14.2
33.9
44.3
102.8
22.8
218
Average remaining maturity
(in years)
13.6
30.8
43.7
99
21.6
208.7
4.6
3.6
4.1
4.5
3.9
4.3
CBPP (EUR 47.3 billion as of 2 April 2013 – settled amount)
CBPP2 (EUR 16.2 billion as of 2 April 2013 – settled amount)
The financial risks are closely monitored and measured
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Non-standard monetary policy measures
(credit operations)
• Provision of unlimited liquidity at various maturities
• Measures to increase collateral availability
Key principles of the risk control framework
– Risk protection
– Consistency
– Simplicity and transparency
– Risk equivalence
(residual risk of assets - after valuation and haircuts - same
for all collateral types)
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Changes to the risk control framework following
non-standard measures
The Eurosystem reviewed its risk control measures together with decisions to
preserve collateral availability for counterparties during 2012:
•
when euro area NCBs have been allowed on 9 February to accept as collateral
additional performing credit claims;
•
when reducing the rating threshold and amending the eligibility requirements for
certain ABSs on 29 June;
•
on 6 September when the marketable debt instruments denominated in currencies
other than the euro (USD, GBP, JPY) issued and held in the EA became eligible;
•
on 19 December when eligibility of debt instruments issued or guaranteed by the
Hellenic Republic was reinstated (the application of the minimum credit rating
threshold was suspended on 6 September in the case of assets issued or
guaranteed by OMT or EU/IMF programme-complying countries);
22
Collateral put forward in Eurosystem credit
operations by asset group
central government securities
regional government securities
uncovered bank bonds
covered bank bonds
corporate bonds
asset-backed securities
other marketable assets
non-marketable assets
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
(percentages; annual averages)
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Risk mitigation framework for Eurosystem
credit operations (1)
• Counterparties must be financially sound;
• According to Article 18.1 of the Statute of the ESCB, all
credit shall be based on adequate collateral;
• Collateral alone cannot eliminate or even sufficiently mitigate
financial risks; there are two possibilities of loss, once a
counterparty defaults:
– A “double default event”: Very small probability as long as:
(a) collateral satisfies high credit standards; and
(b) close financial links between counterparty and collateral issuer
are prohibited;
– Losses incurred in realising collateral in illiquid market conditions:
Use correct valuation and risk control measures to keep probability
of such losses small.
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Risk mitigation framework for Eurosystem
credit operations (2)
To guarantee that the quality and quantity of collateral provide adequate protection
to the Eurosystem, three risk mitigation tools are required:
Risk mitigation within the collateral framework
Eurosystem
Credit
Assessment
Framework
(ECAF)
Collateral
valuation
Risk
control
measures
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The Single Supervisory Mechanism
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The Single Supervisory Mechanism (SSM)
Establishment of the SSM
• Need to speed up strengthening of Economic and Monetary Union (EMU)
because of:
• Sovereign debt crisis
• Contagion in the banking sector
• Milestones of the process in 2012 and in 2013
• 29 June: Euro area Summit – Request to set up a single supervisory
mechanism (SSM)
• 12 September: European Commission proposal for a Council
Regulation
• 18 October: European Council conclusions on completing EMU
• 13 December: European Council agreement on SSM
• 19 March 2013: Provisional agreement on SSM between European
Council and European Parliament
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The Single Supervisory Mechanism (SSM)
Two main advantages and goals of establishing the SSM
• Will address the so-called “financial trilemma”
• Impossibility of achieving financial stability, financial integration and
maintaining national financial policies in a globalised financial market
• Together with a single resolution mechanism, will help to break the
negative feedback loops between sovereigns and banks
• Increasing debt levels of sovereigns that provided financial support to
struggling banks
• Losses for banks from exposures to sovereigns under stress
• Break the correlation between the cost of funding of euro area banks
and that of their respective sovereigns
• Need for a common resolution mechanism
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The Single Supervisory Mechanism (SSM)
Main features of the SSM
• Single system of supervision
• The ECB will take all decisions regarding the banks, banking groups and
respective components categorised as “significant” (around 150 banks in
the euro area countries)
• Banks with more than €30 billion in total assets
• Banks representing more than 20% of domestic GDP (unless <€5
billion in assets)
• 3 most significant banks in each country (unless justified by particular
circumstances)
• Banks receiving direct assistance from the EFSF/ESM
• The ECB can decide to exercise direct supervision of other banks
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The Single Supervisory Mechanism (SSM)
Main features of the SSM (cont.)
• The national supervisors will take the decisions regarding “non-significant”
banks subject to regulations, guidelines or general instructions
• Close cooperation with non-euro area Member States
• The ECB can conduct supervision in a non-euro area EU Member
State, following a request for close cooperation
• Transition
• The SSM will start supervision one year after the entry into force of
the regulation
• ECB may choose to postpone the start if it deems that it is not ready
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The Single Supervisory Mechanism (SSM)
ECB’s guiding principles for establishing the SSM
• Comprehensiveness and strong institutional framework
• Independence
• Clear separation of monetary policy and supervisory responsibilities
• Decentralisation
• Consistency with the single market
• Accountability
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The Single Supervisory Mechanism (SSM)
Establishment of a banking union
• “Towards a genuine Economic and Monetary Union”
Final Report by the President of the European Council (December 2012)
• Core elements of a banking union:
• A Single Supervisory Mechanism (SSM) consisting of the ECB and national
supervisors
• A single bank resolution mechanism, including an independent resolution
authority and a European resolution fund
• More harmonised and sufficiently robust deposit-guarantee mechanisms in
the EU
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Thank you for your attention
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