Factbox The ECB s standard and non standard measures
Post on: 2011-11-02 By: admin
FRANKFURT (Reuters) - Until the financial crisis hit in 2008, the ECB relied mainly on interest rates and a simple menu of refinancing operations to steer monetary policy toward meeting its brief of ensuring price stability.
But as the worst crisis since World War II took hold, the ECB introduced a number of non-standard measures to prop up bank lending, calm bond markets and smooth out financing conditions.
Below are details and timings of standard and non-standard measures the ECB is employing to help keep a lid on the euro zone's sovereign debt troubles, compared with how the bank operated prior to the crisis.
INTEREST RATES
The ECB sets interest rates for the main refinancing operations (MRO) as well as marginal lending and deposit facilities at policy meetings usually held on the first Thursday of each month.
Interest rate moves are made in multiples of 0.25 percentage points. The benchmark, 'main refinancing' rate is the minimum level of interest it charges banks for funding loans.
The rates on the ECB's overnight deposit and overnight loan facilities are set at 75 basis points on either side of its main policy rate, currently 1.5 percent. Before October 2008 the gap was 100 basis points.
The overnight loan rate -- 2.25 percent -- normally acts as a ceiling for bank-to-bank lending rates while the deposit facility rate -- 0.75 percent -- acts as a floor.
REFINANCING OPERATIONS
In normal times, banks can use the ECB's one-week, three-month and overnight lending and deposit facilities. The ECB can also hold 'fine-tuning' operations to add or suck up cash from the system for as little as one day.
Weekly funding is offered usually every Tuesday and three-month money on the last Wednesday of each month.
At the peak of the financial crisis the ECB introduced extra one-month, six-month and one-year lending operations to help the banking system.
In 2008 it also began offering dollar and Swiss franc liquidity. In 2010, a deal with the Bank of England allowed Ireland's central bank to provide sterling liquidity.
Banks must post collateral to borrow from the ECB.
The same collateral rules apply to all refi operations including the overnight facility -- a crucial emergency backstop which gives euro zone banks instant access to ECB funding.
Around 1,700 banks can borrow from the ECB. Before the crisis a far smaller number were able to take part in its quickfire 'fine tuning' operations, but the ECB threw open these operations to all back in 2008.
As the economy began to recover from the 2008 financial crisis, the ECB began to reel in its safety net and withdrew one-year and six-month fundings in late 2009.
But as the economic picture soured again the ECB reintroduced the measures, and said this month it will continue to offer unlimited funding for as long as necessary and at least until the middle of next year.
FIXED RATE, FULL ALLOTMENT
In October 2008, the ECB switched from its traditional procedure of lending cash to banks at variable interest rates in auction-style tenders, to lending banks as much as they wanted at a flat rate.
The ECB has said it will keep the arrangement in place "for as long as necessary," for its weekly MRO at least until July and for its one-month operations at least until the end of June 2012.
It will lend banks unlimited funds in three-month operations each month from October to June next year. Banks will pay a set rate of interest for the money. That will be an average of the ECB's main interest rates over the time they have the money, meaning the final price will depend on whether the ECB cuts, keeps steady or hikes rates during those periods.
This rule also applies to the 6- and 12/13-month tenders.
COLLATERAL RULES
During the crisis the ECB has several times widened the range of assets banks can use as insurance to borrow ECB cash, and made a number of other ad hoc changes to its rules.
It has formally lowered the quality threshold on most assets to BBB- from A- and drawn up a new list of charges it applies on weaker assets. It also continues to accept some foreign currency debt.
Hard-to-value asset-backed securities (ABS) are the exception and still require top class ratings to be accepted by the ECB.
The ECB recently revised its collateral rules meaning the new terms will remain in place until further notice.
COVERED BOND BUYING
The ECB will launch a fresh round of covered bond purchases in November to facilitate bank lending. The new program is worth 40 billion euros, smaller than a first 60-billion-euro program that ended in June last year.
The new program will run until the end of October 2012. The ECB has said it will hold the bonds until maturity and is due to lay out some details at its Nov 3 meeting.
GOVERNMENT BOND BUYING
The ECB began buying government bonds in May last year to help calm euro zone government bond markets when Greece's debt problems threatened to spill over to other states.
After a pause of about four months, the ECB reactivated the purchase program in August, expanding it to Italian and Spanish bonds. So far, the ECB has bought bonds worth 173.5 billion euros in total, excluding ones that have already matured.
The ECB has said the purchases will be 'sterilized' each week. It asks banks to deposit an amount equal to the total of its purchases to re-absorb the injected liquidity.
The ECB has not put a timeframe on the purchases.
While it might look to pass responsibility for bond buying on to the euro zone's beefed-up EFSF bailout fund, many economists expect the ECB to keep the program in place for the foreseeable future.
(Reporting by Eva Kuehnen; Editing by John Stonestreet)
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