In the implementation of monetary policy, the Eurosystem conducts credit operations with counterparties fulfilling certain eligibility criteria defined in the “General
Documentation” on Eurosystem monetary policy instruments and procedures.
Although the eligibility criteria require such counterparties to be financially sound, the Eurosystem may still be exposed to the risk of unexpected counterparty defaults.
This risk is mitigated by requiring counterparties to submit adequate collateral, in line with the standard practice of central banks worldwide.
In 2014 the Eurosystem continued to ensure that sufficient collateral was available to a wide set of counterparties, so that the Eurosystem could provide the appropriate amount of liquidity in its monetary policy operations.20 Moreover, the financial risks related to liquidity-providing operations were continuously monitored and quantified at the Eurosystem level and reported to the ECB’s decision-making bodies on a regular basis.
In the course of 2014 the Eurosystem adopted several measures to enhance its eligibility criteria and the risk control framework that protects it against the risk of financial loss if assets have to be realised owing to the default of a counterparty.
For example, the Governing Council further refined the loan-level data requirements for ABSs. In addition, the rules for assigning the appropriate rating to determine the eligibility of marketable assets and their related haircut were modified. As regards the temporary collateral framework, the Governing Council adopted Guideline ECB/2014/31, which recasts Guideline ECB/2013/4 in the interest of clarity and allows the inclusion, in the additional credit claims framework, of certain short-term debt instruments issued by non-financial corporations that would otherwise not satisfy the Eurosystem eligibility criteria for marketable assets, provided that they comply with a number of specific criteria.
2.4 Communication on the Eurosystem’s balance sheet
The Governing Council communicated that its monetary policy measures – both lending operations and asset purchases – would have a sizeable impact on the Eurosystem’s balance sheet.
This communication was aimed at addressing uncertainty about the overall scale of the measures. The uncertainty arose because a key element of the June-October package – the volume of TLTROs – will largely be determined by the demand from the Eurosystem’s counterparties, i.e. the decisions by individual banks to participate in the operations. Therefore, while each unit of liquidity introduced through the June-October monetary policy measures has a lasting credit-easing impact, the total amount of stimulus injected could not be anticipated precisely.
Thus, the communication on the balance sheet size reflected the Governing Council’s intention to ensure that the degree of monetary stimulus would prove appropriate to raise annual HICP inflation rates to levels below, but close to, 2%. However, the size of the Eurosystem’s balance sheet is not a target of monetary policy. Rather, active balance sheet management remains an instrument employed in pursuit of the ECB’s price stability mandate once the effective lower bound for very short-term nominal interest rates has been reached.
20 Detailed information on eligible marketable assets as well as on the use of collateral and outstanding credit is published on the ECB’s website.
3 Repair and confidence-building: the European financial sector
The ECB’s activities in 2014 included its substantial contribution to strengthening the stability of and building confidence in the European financial sector. In this context, the ECB undertook a series of actions, including regularly assessing emerging risks and the resilience and shock-absorbing capacity of the financial system; analysing the links between the financial system and the economy; carrying out a comprehensive assessment of significant credit institutions; and participating in discussions on shaping the regulatory framework at both the international and EU levels. Furthermore, with the establishment of the Single Supervisory Mechanism (SSM) on 4 November 2014, the ECB formally assumed its micro- and macro-prudential tasks. This new framework will ensure that both institution-specific and systemic risks in the financial system are identified and addressed in a timely and effective manner, in close cooperation with authorities in participating Member States.
This section describes the main developments in the above areas, focusing on how the ECB’s activities as well as institutional and regulatory changes contributed to the repair of the financial system, weakening the nexus between banks and sovereigns and building confidence in the EU financial sector.
3.1 Safeguarding financial stability
21– a key task for the ECB
The ECB’s financial stability analysis is regularly presented in, for example, its semi-annual Financial Stability Review.22 The ECB also provides analytical support to the European Systemic Risk Board (ESRB) in the area of financial stability analysis. During 2014 the ECB’s financial stability analysis supported in particular the development of the adverse stress-test scenarios for the EU-wide stress test of banks and insurance firms that were provided by the ESRB.23 These scenarios were used in the EU-wide bank stress-testing exercise conducted by the European Banking Authority (EBA) on which the ECB’s comprehensive assessment of banks built24, as well as in the insurance stress test of the European Insurance and Occupational Pensions Authority (EIOPA)25.
21 The ECB defines financial stability as a condition in which the financial system – intermediaries, markets and market infrastructures – can withstand shocks without major disruption in financial intermediation and in the effective allocation of savings to productive investment.
22 See Financial Stability Review, ECB, May 2014 and Financial Stability Review, ECB, November 2014.
23 See “EBA/SSM stress test: The macroeconomic adverse scenario” and “EIOPA/ESRB adverse financial market scenarios for insurance stress test”, ESRB, April 2014.
24 See Aggregate report on the comprehensive assessment, ECB, October 2014.
25 See EIOPA insurance stress test 2014, EIOPA, November 2014.