Eurosystem has taken a number of non-standard measures complementing its regular operating framework.
Before the financial turmoil, the Eurosystem used to provide a pre-set amount of credit to banks through open market operations conducted through tender procedures, in which banks put up adequate collateral to guarantee the loans. Banks would also lend to and borrow from each other in the interbank market to meet their liquidity needs.
The turmoil in international money and capital markets triggered by the financial crisis affected banks in the euro area as well, which faced a lack of liquidity already from early August 2007. There were also dysfunctions in money markets. Thus, the Eurosystem decided to introduce several non-standard monetary policy measures, as described below, which have responded to the challenges posed by the different phases of the crisis.
In the first phase of the crisis, amid a lack of liquidity and dysfunctions in money markets, banks were reluctant to lend to each other in the interbank market due to a perceived increase in counterparty credit risk. Against this background, the primary aim of the Eurosystem’s non-standard measures was to provide liquidity to banks and to keep financial markets functioning.
During that first phase of the crisis, the Eurosystem decided:
- to adopt a fixed-rate full allotment tender procedure for open market operations (since October 2008);
- to extend the maturity of open market operations (through six-month longer-term refinancing operations and three one-year operations) and to conduct complementary three-month open market operations; and
- to expand the range of eligible assets that could be used as collateral in refinancing operations.
In the second phase of the crisis, which took the form of a sovereign debt crisis, the Eurosystem’s non-standard monetary policy measures aimed to address markets’ malfunctioning to reduce dispersion in financing conditions faced by businesses and households in different euro area countries.
In the second phase of the crisis, the Eurosystem:
- conducted the Securities Markets Programme (SMP) and intervened in the secondary market by purchasing government bonds issued by certain countries (from May 2010 to September 2012);
- purchased eligible covered bonds under its Covered Bond Purchase Programme − CBPP1 (July 2009-June 2010) and CBPP2 (November 2011-October 2012);
- carried out two Very Long-Term Refinancing Operations (VLTROs) with a maturity of three years (December 2011-February 2015);
- announced, in September 2012, Outright Monetary Operations (OMT), i.e. purchases of government bonds subject to strict conditionality. The programme has never been activated.
In the third phase of the crisis, the Eurosystem's non-standard measures were aimed to address the risk of deflation. With short-term interest rates already close to zero, the non-standard measures were intended to influence the whole constellation of interest rates that are relevant for financing conditions in the euro area.
The non-standard measures during the third phase of the crisis included:
- a negative interest rate on the deposit facility (since June 2014),
- Targeted Longer-Term Refinancing Operations (TLTROs), designed to support bank lending to businesses and households. The first series of operations (TLTRO I) was announced in June 2014, the second (TLTRO II) in March 2016 and the third (TLTRO III) in March 2019;
- forward guidance, which means communicating how the ECB expects its policy measures to evolve in the future and what conditions would warrant a change in the policy stance (since July 2013); and
- the expanded asset purchase programme (APP).
The spread of the coronavirus (COVID-19) in early 2020, has been a major shock to the growth prospects of the global and euro area economies. In the face of economic disruptions and heightened uncertainty in money markets the Eurosystem decided on a comprehensive package of monetary policy measures. Together with the monetary policy stimulus already in place to counter the financial crisis, these measures aim to the smooth provision of credit and better access to funds for those hardest-hit by the spread of the virus like households and small to medium-sized firms. To succeed in its scope, ECB made borrowing easier to banks by keeping its key interest rates at historically low levels, by initiating new refinancing operations and at the same time expanding the list of assets that banks can bring as collateral to get refinancing, and by increasing asset purchases to help boost spending and investments.
The non-standard measures during the pandemic included:
additional longer-term refinancing operations (LTROs) to provide immediate liquidity support at favourable terms to the euro area financial system, followed by a new series of pandemic emergency longer-term refinancing operations (PELTROs) to preserve the smooth functioning of money markets during the pandemic,
- the application of considerably more favourable terms during the period from June 2020 to June 2022 to all outstanding TLTRO III operations, with the aim to support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises,
- a temporary envelope of additional net asset purchases of €120 billion until the end of 2020, within the existing asset purchase programme (APP) of net purchases up to €20 billion per month, ensuring a strong contribution from the private sector purchase programmes. This envelope will further support favourable financing conditions for the real economy in times of heightened uncertainty,
- a new temporary asset purchase programme of private and public sector securities the Pandemic Emergency Purchase Programme (PEPP) with an overall envelope of €1.850 billion until at least the end of March 2022, to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak of the coronavirus. It is noted that the new PEPP includes the purchase of securities issued by the Greek government,
- the adoption of collateral easing measures to ensure that counterparties continue to be able to make full use of Eurosystem liquidity support,
- the enhancement of existing swap lines with central banks across the globe to ease strains in global funding markets and preserve financial stability.