As Maverecon professor blogger Willem Buiter has been writing for a while, the ECB is uniquely different to other central banks in terms of the unconventional credit easing operations it has been conducting during the crisis, and as far as its positioning on the way into the crisis.
As Buiter has stressed, the ECB has accepted all manner of unconventional collateral (mortgage-backed securities et cetera) at its liquidity windows since inception.
But here in a paper by ECB president Jean-Claude Trichet presented in Munich this week is, in startling clarity, to what degree it has done so. The following extract comes in a portion explaining how the ECB’s ‘enhanced credit support’ is different from other central banks (our emphasis):
2. The second building block of our new liquidity management approach is the list of assets that we take as collateral. This list was already very long before the crisis. We have enlarged it further and now accept an even wider range of securities as collateral.
Government securities account for less than half of the nominal value of the securities on the list. The rest are private securities. By contrast with many other central banks, the ECB already accepted private paper before the crisis. In this sense, we were fairly well prepared for the crisis, as we had a relatively “modern” collateral framework. As a consequence, the total value of these eligible securities is currently €12.2 trillion, equivalent to 130% of the GDP of the euro area. This very broad range of eligible collateral has considerably eased banks’ liquidity constraints during the crisis.
This shows just how dependent European banks have always been on private securities for short-term liquidity. This, of course, is largely down to the fact there isn’t that much quality European-government paper to go round the Euro Zone. It’s consequently not been the tradition for the ECB to focus on government securities in its open market operations. As Trichet states:
For us, “reverse transactions” with banks — on the basis of repurchase agreements or collateralised loans — are the single most important — and in many respects exclusive — instrument in open market operations.
The problem for the ECB in the longer term therefore is addressing fresh supply of private securities. This is because fresh supply — which has stalled due to the crisis — is drastically needed to keep the liquidity engine of the ECB moving. It is in this context — the hope to stimulate fresh issuance of eligible private securities — that the ECB’s covered bond purchase programme was actually launched, not for the purposes of quantitative easing.
In fact, it seems it was never the intention for it to be anything but a stimulant for mortgage-backed issuance. This is abundantly clear from the following comment:
Why did we decide to engage in purchases of this particular asset class? Several factors guided our decision. • First, as I have stressed, in the euro area measures to support the flow of credit to the non-financial sector need to operate first and foremost through banks. Covered bonds were a major source of funds for banks in the euro area before the intensification of the financial crisis last autumn, when the covered bonds market virtually shut down. The Governing Council came to the conclusion that the Eurosystem could help to revive this market, in terms of liquidity, issuance and spreads, by engaging in outright purchases of covered bonds.And further so by these:
We are confident that this measure will contribute to support financial markets. The announcement effect has been encouraging. The purchase programme started last week and will be conducted gradually, stretching well into next year. We are already seeing a number of new issuances of covered bonds and a degree of compression in the spreads in this important segment, which might have an influence also on other financial markets.
More generally, I have already mentioned that different environments call for different actions, even if there is agreement among central banks about the ultimate objectives. This helps to explain why the ECB’s enhanced credit support measures, by contrast with the concepts of “credit easing” and “quantitative easing”, do not involve outright purchases of sovereign debt.
Related links:
Collateral damage at the ECB - FT Alphaville
Forget Latvia, what about Spain? - FT Alphaville
Why the ECB is a good bank with rubbish assets - FT Alphaville
Los covered bonds, por favor - FT Alphaville
