Monetary policy of the ECB in crisis times By Stefan Terink

Content 1. Introduction 2. Instruments 3. Balance Sheet Development 4. Maintenance Period Front Loading 5. Key Interest Rate 6. Spike In Lending Facility 7. Wrap-up

1. Introduction European Central Bank Established in 1998 Objective: Maintain price stability

2. Instruments Three main tools: Open Market Operations Standing Facilities Reserve Requirements

3. Balance Sheet Development 6 significant changes in the balance sheet 1 2 3 4 5 6

3. Balance Sheet Development 1: Tension in the interbank market? 1 2 3 4 5 6

3. Balance Sheet Development 2: Fixed rate tender with full allotment 1 2 3 4 5 6 In reaction to the collapse of the interbank market after the default of Lehman in september 2008. 15 October 2008: Fixed rate tender with full allotment This results in an over liquidited market. Therefeore there are some absorbing operations.

3. Balance Sheet Development 3: 12 months lasting loans 1 2 3 4 5 6 7 may 2009: 12 months lasting loans were introduced. This should take some uncertainty away for the liquidity market. Never done before, since it is really risky!

3. Balance Sheet Development 4: Start buying covered bonds 1 2 3 4 5 6 Decision at 17 may 2009: Start buying covered bonds in july. "[T]he idea is to revive the market, which has been very heavily affected, and all that goes with this revival, including the spreads, the depth and the liquidity of the market."

3. Balance Sheet Development 5: Start buying Greek bonds 1 2 3 4 5 6 10 may 2010: Start Buying Greek bonds

3. Balance Sheet Development 6: Ratio MRO – LTRO is almost the same again 1 2 3 4 5 6 MRO = Main refinancing operations LTRO = Long-Term refinancing operations

4. Maintenance Period Front Loading Deposit Facility in normal times

4. Maintenance Period Front Loading Deposit Facility in crisis times Front loading, the banks put their money in the first days in the deposit facility. Also the values are much higher because the interbank market is still not at the old value!

5. Key Interest Rate Narrowing the corridor should decrease the volatility  less uncertainty. Corridor is needed to monitor the balance sheets of banks.

6. Spike In Lending Facility Auction of deposits of Anglo Irish Bank and Irish Nationwide Building Society In order of the closure and the gradual wind-down of Ireland’s two worst lenders. Deposits are a liability on a bank’s books and cannot be sold unless they are matched with a corresponding asset. The marginal lending facility was used to provide the ‘corresponding asset’.

7. Wrap-up What did the ECB? Result: Fixed rate tender with full allotment 12 months lasting loans Start buying covered bonds Start buying Greek bonds Result: Ratio MRO – LTRO is almost the same again

References S. Gray. Central Bank Balances And Reserve Requirements J. B. Taylor. The Financial Crisis And The Policy Responses: An Empirical Analysis Of What Went Wrong M. Catalao-Lopes. Fixed- and Variable-Rate Tenders in the Management of Liquidity by the Eurosystem: Implications of the Recent Credit Crisis www.ECB.int

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