The ECB’s Governing Council announced on Wednesday 18 March 2020 a new Pandemic Emergency Purchase Program with an envelope of €750 billion until the end of the year, in addition to the €120 billion decided on 12 March. Together this amounts to 7.3% of euro area GDP. The program is temporary and designed to address the unprecedented situation the monetary union is facing. It is available to all jurisdictions and will remain in place until ECB assesses that the coronavirus crisis phase is over.
- The objective of the ECB through this program is to provide relief to banks in order to boost loans to businesses and households, as well as to support production and employment.
- This action is similar to that taken by the Fed in the US, which includes the purchase of $500 billion in T-bills and $200 billion in mortgage-backed securities to support the smooth functioning of these marketplaces.
- The new instrument has three main advantages. First, it fits the type of shock we are facing: exogenous, detached from economic fundamentals and affecting all countries in the Euro Area. Second, it allows to intervene in the entire yield curve, preventing financial fragmentation and distortions in credit pricing. Third, it is tailored to manage the staggered progression of the virus and the uncertainty about when and where the fallout will be worst.
- This is reflected in the terms and conditions of the new program. While the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks, purchases will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.
- Moreover, to the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks faced.
- ECB is fully prepared to increase the size of the asset purchase programs and adjust their composition, by as much as necessary and for as long as needed. ECB will explore all options and all contingencies to support the economy through this shock.
- ECB also decided to purchase commercial papers of sufficient credit quality and to expand the eligible collateral in its refinancing operations. The aim is to reinforce the actions that ECB took last week to protect the flow of credit to companies and people.
- ECB is making available up to €3 trillion in liquidity through its refinancing operations, including at the lowest interest rate ever offered, -0.75%. Offering funds below ECB deposit facility rate allows to amplify the stimulus from negative rates and channel it directly to those who can benefit most. European banking supervisors have also freed up an estimated €120 billion of extra bank capital, which can support considerable lending capacity by euro area banks.
On April 7, 2020, the Governing Council of the ECB adopted a package of temporary collateral easing measures to facilitate the availability of eligible collateral for Eurosystem counterparties to participate in liquidity providing operations. The emergency collateral package contains three main features:
- Expansion of the use of credit claims as collateral, in particular through the potential expansion of the additional credit claims (ACCs) frameworks. The ACC framework provides the possibility to National Central Banks to enlarge the scope of eligible credit claims for counterparties in their jurisdictions, including the possibility to accept loans with lower credit quality, loans to other types of debtors, not accepted in the ECB’s general framework, and foreign-currency loans.
- Adoption of the following temporary measures:
- Lowering of the level of the non-uniform minimum size threshold for domestic credit claims to EUR to facilitate the mobilisation as collateral of loans from small corporate entities;
- An increase, from 2.5% to 10%, in the maximum share of unsecured debt instruments issued by any single other banking group in a credit institution’s collateral pool. This will enable counterparties to benefit from a larger share of such assets.
- A waiver of the minimum credit quality requirement for marketable debt instruments issued by the Hellenic Republic for acceptance as collateral in Eurosystem credit operations.
- Temporary increase its risk tolerance level in credit operations through a general reduction of collateral valuation haircuts by a fixed factor of 20%.
On April 22, 2020, the Governing Council of the ECB adopted an additional package of temporary measures to mitigate the effect on collateral availability of possible rating downgrades resulting from the economic fallout from the COVID-19 pandemic. This decision complements the broader collateral easing package as described above.
The goal of both measures is to ensure that banks have sufficient assets to mobilize as collateral with the Eurosystem to participate in the liquidity-providing operations and to continue providing funding to the euro area economy.
Through the measures announced on April 22, 2020, the ECB Governing Council aims to avoid potential procyclical dynamics by grandfathering the eligibility of marketable assets (that fulfilled minimum credit quality requirements on 7 April 2020) in the event of a deterioration in credit ratings decided by the credit rating agencies accepted in the Eurosystem.
More specifically, the following temporary measures have been adopted:
- Marketable assets and issuers thereof that met the minimum credit quality requirements for collateral eligibility on April 7, 2020 will continue to be eligible in case of rating downgrades, as long as their rating remains at or above credit quality step 5 (i.e. CQS5, equivalent to a rating of BB) on the Eurosystem harmonized rating scale. This ensures that’s assets and issuers that were investment grade at the time the Governing Council adopted the package of collateral easing measures remain eligible even if their rating falls two notches below the current minimum credit quality requirement of the Eurosystem;
- To be grandfathered, the assets need to continue to fulfil all other existing collateral eligibility criteria;
- Future issuances from grandfathered issuers will also be eligible provided they fulfill al other existing collateral eligibility criteria;
- Currently eligible covered bond programmes will also be grandfathered, under the same conditions;
- Currently eligible ABSs to which a rating threshold in the general framework of CQS2 applies (equivalent to a rating of A-) will be grandfathered as long as their rating remains at or above CQS4 (equivalent to rating of BB+);
- Assets that fall below the minimum credit quality requirements will be subject to haircuts based on their actual ratings.
Non-marketable assets are not part of the scope of the temporary grandfathering. All measures will enter into effect as soon as the relevant legal acts enter into force and will apply until September 2021. The same end date will also apply to the collateral easing measures announced on April 7, 2020.
These measures are temporary for the duration of the pandemic crisis and linked to the duration of the Pandemic Emergency Purchase Program (outlined above). They will be re-assessed before the end of 2020.
On April 30, 2020 the ECB decided on a number of modifications to the terms and conditions of its targeted longer-term refinancing operations (TLTRO III):
- Interest rate on all targeted TLTRO III reduced by 25 basis points to -0,5% from June 2020 to June 2021;
- For banks meeting the lending threshold of 0% introduced on March 12, 2020, the interest rate can be as low as -1%;
- Start of the lending assessment period brought forward to March 1, 2020.
The ECB further decided to conduct a new series of seven additional longer-term financing operations, called pandemic emergency longer-term refinancing operations (PELTROs). Counterparties participating in PELTROs will be able to benefit from the collateral easing measures in place until the end of September 2021 that were announced by the Governing Council on 7 and 22 April 2020.
The PELTROs will be conducted as fixed rate tender procedures with full allotment. The interest rate will be 25 basis points below the average rate applied in the Eurosystem’s main refinancing operations (currently 0%) over the life of the respective PELTRO. The PELTROs will be conducted according to the indicative calendar published here.