Abstract
The European Central Bank, as other central banks, conducts lending operations only based on adequate collateral. As a consequence, the rules on assets that can be used to access central bank liquidity play a central role in the monetary policy implementation and become pivotal in periods of economic stress when banks increase their reliance on central bank refinancing. In response to the crisis triggered by the Covid-19 pandemic, the Eurosystem adapted its collateral and risk control frameworks in order to ensure that the euro area banks could maintain sufficient collateral to benefit from ample central bank liquidity, thus safeguarding the credit supply to the real economy. The measures adopted by the ECB and the Bank of Italy proved to be beneficial for the Italian and the other euro area banks.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Similar content being viewed by others
Notes
- 1.
See ECB (2011).
- 2.
The implementation of monetary policy in the euro area assigns a central role to credit operations with banks to manage liquidity in the money market and influence interbank rates; this is due to different reasons: (1) the inability to purchase or sell very short-term securities owing to the lack of a sufficiently developed market (like the US Treasury Bill market); (2) the greater reliance of the real economy on bank lending relative to market funding.
- 3.
See Bindseil (2014).
- 4.
See ECB (2006).
- 5.
Prior to 2008, the amount of liquidity to be offered to banks was defined ex ante by the ECB and was distributed to the counterparties participating in monetary policy operations through a competitive tender system.
- 6.
See Koulischer and Struyven (2014).
- 7.
See Bindseil et al. (2017).
- 8.
With regard to marketable assets, the ECB publishes on its website the list of the eligible assets, which is updated daily by the NCB of the country where the asset is admitted to trading on both regulated or recognised non-regulated markets. The eligibility of credit claims is self-assessed by the counterparties on the basis of pre-defined public criteria. The self-assessment is followed by ex-post checks performed by the competent NCB.
- 9.
Where the same bond has more than one rating issued by the recognised rating agencies, the Eurosystem considers the best rating; for ABSs it requires two ratings not lower than A.
- 10.
See ECB (2015).
- 11.
In theory, haircuts would not be necessary if the instantaneous liquidation of collateral were feasible. However, this is not the case, as a certain amount of time is required to sell the collateral in the market, even for the most liquid assets. More illiquid collateral might require weeks or even months to be smoothly sold in the market. Thus, the valuation haircuts depend primarily on the liquidity of the assets, which determines the length of time required to sell them on the markets. The liquidation period is estimated on the basis of the observed market liquidity.
- 12.
The Expected Shortfall at 99% confidence level is the expected loss in the worst 1% of cases.
- 13.
This means that very long time windows of historical data are used in the calibration.
- 14.
Marketable assets have much lower valuation haircuts than non-marketable assets. Among marketable assets, the lowest haircuts are assigned to government bonds, while ABSs and unsecured bank bonds are subject to the highest haircuts.
- 15.
The Common Eurosystem Pricing Hub (CEPH) calculates a theoretical price for all assets for which a market price is not available. If the value of the collateral falls below the value of the outstanding refinancing operations (this may occur, for example, in case of decrease in prices or rating downgrades) the competent NCB requests to the counterparty to pledge additional collateral (so-called margin call).
- 16.
The risk of a set of assets is smaller than the sum of the risks of the individual assets (unless the assets are perfectly correlated). The haircuts applied to loan portfolios follow this principle: they are calibrated on a portfolio-wide basis, rather than as a sum of the risks of individual loans.
- 17.
For the sake of simplicity, the table only reports valuation haircuts applied to fixed rate instruments. Lower valuation haircuts are applied to floating rate credit claims and higher haircuts are applied to zero-coupon instruments. The haircuts for portfolios of credit claims differ from those shown in the table.
- 18.
The haircuts applied to credit claims are appropriately increased to take into account the absence of a market price.
- 19.
It is assumed that, on the basis of the Eurosystem’s harmonised rating scale, the credit quality of the Italian government bond and that of the loan are the same.
- 20.
- 21.
See Lagarde (2020).
- 22.
See de Guindos and Schnabel (2020).
- 23.
- 24.
Valuation haircuts for marketable assets were reduced by 20% (on average from 9.1 to 7.3%) and by 42% for non-marketable assets (on average from 44.6 to 25.8%).
- 25.
Other measures included the expansion of credit assessment sources for the NCBs’ ACCs frameworks, including IRB systems only approved by the Supervisory Authority for the purposes of calculating capital requirements and not also by the Eurosystem and the simplification of reporting requirements on loans included in the portfolios of ACCs. Moreover, as at the time of the outbreak of the Covid-19 pandemic the Greek government bonds were not eligible as collateral in Eurosystem liquidity operations because their credit rating did not meet the minimum requirements, the ECB decided to temporarily waive the minimum rating requirement for Greek government bonds.
- 26.
- 27.
The overcollateralisation rate is the ratio of the amount of unencumbered assets pledged in the collateral pool to the total collateral pledged and can be interpreted as a proxy for collateral availability.
- 28.
For a general analysis on the use of government guarantees, see ECB (2020).
- 29.
On the basis of a weekly survey conducted by the Bank of Italy on a sample of banks that lend about 90% of the loans to companies, as of 15 June 2022 the requests for the Guarantee Fund for SMEs amounted approximately to 250 billion euros loans. The loans granted under the SACE guarantee scheme amounted approximately to 36 billion euros.
- 30.
In the same period, the increase in the collateral value after haircuts in Italy was 73%.
- 31.
See ECB (2021).
- 32.
See ECB (2022).
References
Bank for International Settlements (2021) Covid-19 policy measures to support bank lending, BIS Quarterly Review, September. https://www.bis.org/publ/qtrpdf/r_qt2109d.pdf
Bank of Italy (2020a) The monetary policy measures adopted by the ECB in March 2020, Economic Bulletin, N. 2/2020. https://www.bancaditalia.it/pubblicazioni/bollettino-economico/2020-2/en-boleco-2-2020.pdf?language_id=1
Bank of Italy (2020b) The monetary policy measures adopted by the ECB, Economic Bulletin, N. 3/2020. https://www.bancaditalia.it/pubblicazioni/bollettino-economico/2020-2/en-boleco-2-2020.pdf?language_id=1
Bank of Italy (2021) The monetary policy measures adopted by the ECB in December 2020, Economic Bulletin, N. 1/2021. https://www.bancaditalia.it/pubblicazioni/bollettino-economico/2021-1/en-boleco-1-2021.pdf?language_id=1
Benigno P, Canofari P, Di Bartolomeo G, Messori M (2021) The ECB’s Measures in Support of the COVID-19 crisis, Working Paper requested by the European Parliament’s Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 18 March 2021. https://www.europarl.europa.eu/cmsdata/230559/LUISS_formatted.pdf
Bindseil U (2014) Monetary policy operations and the financial system. Oxford University Press, Oxford
Bindseil U, Corsi M, Sahel B, Visser A (2017) The Eurosystem collateral framework explained, ECB Occasional Paper Series 189. https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op189.en.pdf
de Guindos L, Schnabel I (2020) Improving funding conditions for the real economy during the COVID-19 crisis: the ECB’s collateral easing measures, ECB Blog Post. https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200422~244d933f86.en.html
European Central Bank (2006) The single list in the collateral framework of the Eurosystem, ECB Monthly Bulletin, May. https://www.ecb.europa.eu/pub/pdf/other/pp75-87_mb200605en.pdf
European Central Bank (2011) The monetary policy of the ECB. https://www.ecb.europa.eu/pub/pdf/other/monetarypolicy2011en.pdf
European Central Bank (2015) The financial risk management of the Eurosystem’s monetary policy operations. https://www.ecb.europa.eu/pub/pdf/other/financial_risk_management_of_eurosystem_monetary_policy_operations_201507.en.pdf
European Central Bank (2020) Public loan guarantees and bank lending in the COVID-19 period, Economic Bulletin, Issue 6/2020. https://www.ecb.europa.eu/pub/economic-bulletin/focus/2020/html/ecb.ebbox202006_07~5a3b3d1f8f.en.html
European Central Bank (2021) What are additional credit claim (ACC) frameworks? https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/acc_frameworks.en.html
European Central Bank (2022) Gradual phasing-out of pandemic collateral easing measures, Economic Bulletin, Issue 3/2022. https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/html/ecb.ebbox202203_07~441fce9f64.en.html
International Monetary Fund (2020) Expanding the Central Bank’s Collateral Framework in Times of Stress, Special Series on COVID-19. https://www.imf.org/-/media/Files/Publications/covid19-special-notes/en-expanding-the-central-banks-collateral-framework-in-times-of-stress.ashx
Koulischer F, Struyven D (2014) Central bank liquidity provision and collateral quality. J Bank Financ 49(C):113–130. https://doi.org/10.1016/j.jbankfin.2014.08.022
Lagarde C (2020) How the ECB is helping firms and households, ECB Blog Post. https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200409~3aa2815720.en.html
Mésonnier J, O’Donnel C, Toutain O (2022) The interest of being eligible. J Money Credit Bank 54(2–3):425–458. https://doi.org/10.1111/jmcb.12851
Tamura K, Tabakis E (2013) The use of credit claims as collateral for Eurosystem credit operations, ECB Occasional Paper Series 148. https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp148.pdf
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2023 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Antilici, P., Gariano, G., Monterisi, F., Picone, A., Russo, L. (2023). The Eurosystem Collateral Framework and the Measures Introduced in Response to the Pandemic Emergency. In: Scalia, A. (eds) Financial Risk Management and Climate Change Risk. Contributions to Finance and Accounting. Springer, Cham. https://doi.org/10.1007/978-3-031-33882-3_3
Download citation
DOI: https://doi.org/10.1007/978-3-031-33882-3_3
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-031-33881-6
Online ISBN: 978-3-031-33882-3
eBook Packages: Economics and FinanceEconomics and Finance (R0)