ECB’s new operational monetary policy framework:
The generous supply of liquidity remains largely intact
On 13 March 2024, the European Central Bank officially presented the results of its “Operational Framework Review”, with which the ECB defines the future framework for the implementation of monetary policy in the eurozone. In our opinion, the result is not a major breakthrough, but primarily a formalisation or, so to speak, a ” streamlining” of what has already been implemented in practice. On the one hand, the central bank is generally sticking to the system of high excess liquidity (albeit to a lesser extent than before) and, on the other hand, it will continue to hold a significant amount of bonds on its balance sheet in future. In other words, the ECB will not gradually return to a monetary policy system of scarce central bank liquidity in the future, as was the case before the post-Lehman financial crisis. In the future, the liquidity supply of European commercial banks will be provided by the following instruments:
• Traditional main refinancing operations (settlement as before via fixed-rate tender procedures with full allotment)
• Provision of three-month LTROs (settlement as before via fixed rate tender procedures with full allotment)
• At a later stage, liquidity is also to be provided via structural refinancing operations (probably some kind of [T]LTROs with a term of more than three months) and via a structural bond portfolio. In other words, the ECB will eventually return to the market as a buyer of bonds. For the time being, however, the focus will be on reducing the ECB’s balance sheet total by phasing out TLTROs and refraining from reinvesting maturities in the purchase programmes.
The ECB has so far remained largely vague on the latter point. In particular, it is unclear what form or duration the structural refinancing operations will take, which bonds the central bank intends to buy to build up its structural bond portfolio and when exactly both measures will begin. There is also the question of the extent to which climate protection aspects will be taken into account in these instruments. As soon as the open questions regarding structural refinancing operations have been clarified, we believe it should be possible to predict the extent to which this instrument can help mitigate the refinancing risks of European commercial banks in the future. Banks with weaker ratings in particular would benefit from the availability of longer-term refinancing funds at attractive conditions. However, as the banks will only be able to benefit from such sources of liquidity at a later date, they do not yet offer any support in refinancing the expiring TLTROs, for which the short-term ECB instruments remain the key for the time being. In the future, however, the provision of such longer-term sources of liquidity by the ECB could certainly have an impact on the refinancing planning of European banks – depending on how generous such a longer-term liquidity supply turns out to be. The spreads of bank bonds (especially those of covered bonds, in our opinion) could then benefit, as the need to issue capital market instruments for refinancing purposes would decrease.