12 July 2018

European Parliament: ECB non-standard-policies and collateral constraints

Government bonds constitute the most important source of collateral, for use in inter-bank and repo transactions. But, the vast bond buying program of the ECB in the context of the PSPP has not led to any collateral scarcity.

In the euro area, one must distinguish between two different aspects:

• Banks need high quality collateral if they want to borrow from the Eurosystem in the context of its standard lending operations.
• Many inter-bank and other financial transactions, such as repo operations and derivative transactions, involve the posting of collateral.

Government bonds constitute the most important collateral, for use in inter-bank and repo transactions. The vast bond-buying program of the Eurosystem within the context of the Asset Purchase Programmes (APP) has reduced especially the amount of government bonds available on the market. But the ECB has bought less than one third of all government bonds outstanding. This implies that there is little reason to think that the Public Sector Purchase Programme (PSPP) has led to a generalized collateral scarcity.

What matters for monetary policy are the assets banks hold on their balance sheet which are accepted as collateral by the ECB (so-called eligible assets). There is no sign that the PSPP has led to a reduction in the eligible assets held by the banking system. In particular banks still hold almost the same amount of sovereign bonds as four years ago, i.e. before the start of the PSPP. Moreover, banks have ample other collateral should they want to borrow from the Eurosystem for standard monetary policy operations.

There is little sign of a lowering of the credit quality of the assets effectively used as collateral by the ECB, but banks tend to prefer less liquid assets as collateral in their operations with the Eurosystem. Given that the Eurosystem does not need liquidity this should not be of great concern.

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