The operational framework for the monetary policy

The Eurosystem’s open market operations play an important role in monetary policy. Such operations are executed by the national central banks on a decentralised basis and are aimed at steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy.

Open market operations are mainly executed in the form of reverse transactions, i.e. transactions where the Eurosystem buys or sells eligible assets under repurchase agreements or conducts credit operations against eligible assets as collateral.

With regard to their regularity and procedures, open market operations can be divided into the four following categories:

• main refinancing operations (MROs);
• longer-term refinancing operations (LTROs);
• fine-tuning operations; and
• structural operations.

Main refinancing operations are the most important open market operations conducted by the Eurosystem and play a key role in fulfilling its goals. 
They are conducted on a weekly basis and provide liquidity with a maturity of one week to commercial banks. These operations are executed by the national central banks on the basis of standard tenders.

Longer-term refinancing operations aim to provide the financial sector with additional longer-term refinancing. They are conducted on a regular basis and usually provide liquidity with a maturity of three months. In these operations, the Eurosystem acts as a rate taker, not intending to send signals to the market regarding the level of interest rates.

Main and longer-term refinancing operations are executed in accordance with the Eurosystem’s tender operations calendar, which is published at least three months before the beginning of each calendar year.

Fine-tuning operations are executed on an ad hoc basis to manage the liquidity situation in the market and in particular to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market.

Fine-tuning operations are primarily executed as reverse transactions, but may also take the form of outright transactions (sale or purchase), foreign exchange swaps and the collection of fixed-term deposits.

These operations are normally executed by the national central banks through quick tenders, although bilateral procedures may also be used.

The Governing Council of the ECB may decide whether, under exceptional circumstances, fine-tuning operations may be executed by the ECB itself.

Furthermore, the Eurosystem may carry out structural operations in order to adjust the structural position of the Eurosystem vis- à-vis the financial sector.

Structural operations in the form of reverse transactions and the issuance of debt instruments are carried out by the national central banks through standard tenders.

Structural operations in the form of outright transactions are executed through bilateral procedures.

The standing facilities, which are available to eligible counterparties on their own initiative, are a) the marginal lending facility and b) the deposit facility. More specifically:

Marginal lending facility: counterparties can use the marginal lending facility to obtain liquidity from the national central banks at a pre-specified interest rate against eligible assets, in order to meet temporary liquidity needs. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.

Deposit facility: counterparties can use this facility to make overnight deposits with national central banks at a pre-specified interest rate. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate. No collateral is required for the deposit.

Under the Eurosystem’s minimum reserve system, the ECB requires credit institutions to hold deposits on accounts with their national central bank, which constitute the “minimum” or “required” reserves.

Credit institutions must meet the minimum reserve requirement on the basis of their average daily reserve holdings over a period of six weeks, which is called maintenance period. The use of averaging provisions enables credit institutions to manage their liquidity each day, since they do not have to hold the whole sum in their accounts with the national central bank on a daily basis. This helps to stabilise money market interest rates, as well as to smooth the effects of temporary liquidity fluctuations.

The level of minimum reserves is calculated on the basis of credit institutions’ balance sheet items (mainly customers’ deposits), prio to the start of the maintenance period.

From January 2012 onwards, the minimum reserve requirement is calculated by applying a ratio of 1% (compared with 2% which was effective until then) on credit institutions’ balance sheet items that are included in the reserve base.

At the end of the maintenance period, the national central bank pays credit institutions interest on their minimum reserve holdings,  and the interest rate is equivalent to the main refinancing operation (MRO) rate.

The ECB draws up and maintains a list of the credit institutions that are subject to the Eurosystem’s minimum reserve system.