Responses to macro-economic pressures and a worsening outlook1 were addressed on September 12, 2019, by outgoing President Mario Draghi at his penultimate appearance at what was a much anticipated European Central Bank (ECB) Monetary Policy meeting as well as the first press conference following the summer break. Market expectations were for Draghi to continue his pledge to "do whatever it takes" and also "go out with a bang" as opposed to merely passing the monetary policy baton over to President-elect Christine Lagarde.
The ECB Governing Council's conclusions did not disappoint despite drawing criticisms from some Member States (and associations of savers as well as governing council members in France, Netherlands, Austria and Estonia) worried about restarting "extraordinary monetary policy" as well as the on-going impact of negative rates. The ECB announced:2
- a lowering of the deposit facility rate by 10 bps to -0.50 %, with the main refinancing operations rate remaining at 0.00% and the marginal lending facility unchanged at 0.25%;3
- a restart, from November 1, 2019, of the asset purchase programs (APP) (colloquially referred to as quantitative easing – QE) at a monthly pace of €20 billion in net purchases "for as long as necessary to reinforce the accommodative impacts of its policy rates", including in respect of ABSPP securitization purchases. The ECB plans to conclude purchases "...shortly before it starts raising the key ECB interest rates". This leaves a rolling pace as opposed to a stated end date. Crucially, the ECB has, with effect on September 12, 2019, decided4 to buy assets with yields below the deposit facility rate to all financial instruments that are eligible for purchase on any part of the APP. In addition, the ECB plans to continue to reinvest principal payments received from maturing holdings purchased under the APP for a period after the key ECB interest rates begin to rise;
- the start of the third edition of a series of quarterly targeted longer-term refinancing operations (TLTRO III)5 over three years (as opposed to previously two), using an amended methodology67 (including an early repayment option), to preserve accommodative monetary policy through favorable bank-lending, with the interest rate in each quarterly operation being set at the level of the average rate applied in the Eurosystem's main refinancing operations over the life of the respective TLTRO.
- Introducing "tiering", from 30 October, 2019, through a two-tier system8 which exempts eligible credit institutions'9 holdings of excess liquidity (i.e. reserve holdings in excess of minimum reserve requirements) from the ECB's negative deposit facility rate, so as to create an "exempt tier" and a non-exempt tier. The size of the exempt tier will be calculated by reference to a "multiplier", which is determined as a multiple of an institution's minimum reserve requirements so that the exempt tier is calculated on the basis of average end of calendar day balances in the reserve accounts over a maintenance period. The multiplier, which the ECB notes will be adjustable over time and notified to the market, is set the same across all institutions and will be set in a manner such that euro short-term money market rates are not unduly influenced. The ECB has communicated that the first multiplier will be set at 6. The exempt tier of excess liquidity holdings will be remunerated at 0% p.a. and the non-exempt tier will continue to be remunerated at 0% p.a. or the deposit facility rate (see point 1 above) or whichever is the lower.
All of this has put some revised and new stimulus guns (and a couple of bazookas) at the ready coupled with a forward guidance on (eventually) returning to "normalization" in rates (i.e., positive ones) and use of other tools. In summary, the ECB's following announcements are likely to translate into economic impacts but also legal and regulatory considerations that market participants, regardless of their degree of interaction with the ECB, may wish to consider in relation to structuring, optimizing, trading and possibly repackaging and/or warehousing APP-eligible issuances across the spectrum.
That being said, the impact of tiering may not go far enough in relation to what it exempts to give respite from ultralow to negative rates and the continued search for yield. While the exempt tier and its multiplier have to be adopted on a uniform basis by the ECB, so as to avoid being seen at giving preference to certain institutions and jurisdictions, the fact that excess reserves are not homogenously distributed across the Eurosystem's jurisdictions is one that may raise strategic questions for certain affected institutions. This is especially the case given that, though tiering benefits some institutions, and coupled with TLTRO and the APP, opens up new optimization ideas, Draghi stated that affected institutions cannot expect central banks to steer rates to assist individual business models but rather they should seek more sustainable alternatives to boosting their earnings and profitability.
As in past press conferences, Draghi was quick to reiterate that monetary policy cannot be the only game in town and called for much needed fiscal action by the EU and its Member States. That ties in with reinvigorated calls from the incoming EU Commission to press ahead with fiscal reform, be more flexible on the Stability and Growth Pact and get serious about finalizing the Banking and the Capital Markets Union – even if in the case of the latter policymakers at DG-FISMA have been regrettably slow with advancing pan-EU solutions that would provide greater retail investor participation or indeed preferential terms on investment-based savings10.
If the ECB's September MonPol decisions have left an open-ended QE policy which is designed to buy time for growth, then the hope from Frankfurt is that many round the table in Brussels will "do whatever it takes" to tackle fiscal and structural reforms in time, while affected financial institutions and wider market participants still compete in ultra-low rate and yield environments.
If you would like to discuss any of the items mentioned above, in particular how to forward plan any impacts on structuring and documentation of issuances and/or mobilization channels or other operational workstreams or how these priorities may affect your business or your clients more generally, please contact our Eurozone Hub key contacts.
9 I.e., those subject to minimum reserve requirements under ECB Regulation ECB/2003/9. ↩
10 For a discussion on this please see Huertas in "A Little Less Conversation, a Little More Action? EU Unveils CMU Action Plan for Retail Financial Services" in the Journal of International Banking Law and Regulation, Vol. 32, Issue 8 as well as Huertas in "Capital Markets Union and the Need for Greater Retail Investor Participation in Financial Markets: Is Now the Time for an EU-wide ISA?" in the Journal of International Banking Law & Regulation in Volume 31, Issue 9. ↩
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