The European Central Bank and the Federal Reserve have each vastly expanded their asset purchase programmes, lending facilities, and open market operations since the start of the coronavirus outbreak. This stands in sharp contrast to a widespread pre-pandemic view – put forward both by central bank critics as well as some central bankers themselves – that monetary authorities were ‘out of ammunition’ to help combat the next crisis.
As the accompanying tables illustrate, each has found new ways of providing support and liquidity to hard-hit business, often in previously unimaginable ways.
For the ECB, this has involved a significant expansion of its asset purchases programme beyond its self-imposed issuer limits, which it has suspended in the context of its Pandemic Emergency Purchase Programme. It has broadened the scope of eligible assets to include Greek government debt as well as commercial paper issued by non-financial corporations.
European Central Bank conditions on 1 March versus 27 March
|1 March||27 March|
|Main refinancing operations||0%||0%|
|Marginal lending facility||0.25%||0.25%|
|Asset Purchase Programme|
|Size & Time frame||APP at €20bn per month for as long as necessary (decided Sep 2019, effective from Nov 2019)||Original APP + additional envelopes €120bn APP until end-2020 + €750bn PEPP until at least end-2020 (can be extended if crisis persists)|
|Terms of purchase|
|Capital key||Capital key guides purchases in APP||Capital Key remains for APP and PEPP but more flexibility for PEPP|
|Issuer limit||Issuer limit at 33% of any country’s eligible bonds||Issuer limit does not apply to PEPP|
|Eligibility||Eligibility in line with rating requirements||Greek government bonds included in PEPP but not in APP (PSPP). No catch-up purchases of these securities. Non-financial commercial papers (if sufficient credit quality) eligible for CSPP. Easing of collateral standards by adjusting main risk parameters of collateral framework|
|Maturities||Maturities for PEPP extended, new range is from 70 days to 30 years and 364 days. For private securities the maturity range is at 28 days up to 30 years and 364 days. No maturity restrictions of ABSPP and CBPP3-eligible securities|
|Open market operations|
|Additional LTROs||Conducted as fixed rate tender procedures with full allotment, rate fixed at avg of deposit rate. Operations mature June 2020|
|TLTRO III||Conditions apply between June 2020-June 2021|
|Interest rate||As low as avg rate on deposit facility||25bp below avg refi rate and even lower (up to 25bp below avg deposit rate) for those who maintain levels of credit provision|
|Borrowing allowance||30% of stock of eligible loans||Raised to 50%|
|Lending performance threshold||2.5%||Reduced to 0%|
|Limit on stock of eligible loans that can be borrowed in each operation||10%||No limit|
|Repayment options||Early repayment option available after two years from settlement||Early repayment option available after one year from settlement starting in September 2021|
|Relevant ECB document with more info||ECB/2019/21 (July 2019) & ECB/2019/28 (September 2019)|
|Level of capital defined by Pillar 2 Guidance and Liquidity Coverage Ratio||Relaxation of conditions: banks allowed to operate temporarily below level of capital defined by P2G and LCR|
|Capital instruments need to qualify as Common Equity Tier 1 capital||
This is lifted, now banks allowed to partially use capital instruments that do not qualify as CET1 eg Additional Tier 1 or Tier 2 instruments.
The Federal Reserve has not only dusted off its 2008-era toolkit, including the Term Asset-Backed Securities Loan Facility, the Money Market Mutual Fund Liquidity Facility, foreign central bank swap lines, and massive quantitative easing, but has also introduced significant new innovations. Facilities designed to purchase primary and secondary market corporate debt have been introduced, allowing both direct and exchange-traded fund purchases for the first time ever. Significant Treasury support has backstopped this new intervention.
Federal Reserve conditions on 1 March versus 27 March
|Interest rates & key figures|
|Federal Funds target rate||1.5-1.75%||0-0.25%|
|Interest on excess reserves||1.6%||0.1%|
|Discount window rate||2.25%||0.25%|
|Level of reserve balances||$1.64tn||$2.04tn|
|Total balance sheet size||$4.16tn||$5.25tn|
|US Treasuries||$80bn of short-dated bills per month ($20bn for reinvestment, $60bn for reserve management)||Open-ended; ‘at least’ $500bn over coming months. Week ending 25/03 saw $338bn in Treasury purchases, including at long end|
|(Agency) mortgage-backed securities||Existing holdings roll off; $20bn of MBS holdings reinvested into Treasuries, remaining small share reinvested into MBS (average $5bn)||Open-ended; ‘at least’ $200bn over coming months. Week ending 25/03 saw $156.7bn in MBS purchases|
|Corporate credit/ETFs||N/A||Total target volume unspecified; can buy up to 20% of any investment-grade credit ETF|
|Policy lending facilities – term sheets here|
|Commercial Paper Funding Facility – SPV designed to ensure CP market liquidity||Made $738bn in purchases between 2008 and 2010; closed down 2010||Total CP market size > $1tn. CPFF can at most purchase is the max. amount of commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020|
|Primary Dealer Credit Facility – overnight loan facility for primary dealers against eligible collateral||Last active between 2008 and 2010||Active, no explicit total limit. Individual loan size limit is the amount of margin-adjusted eligible collateral pledged by the dealer. Take up $27bn as of 27/03|
|Money Market Mutual Fund Liquidity Facility – lending to a range of eligible borrowers, taking as collateral assets purchased by the borrowers from MMMFs||N/A; similar to 2008-era Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility||Active, no explicit total limit. Eligible securities estimated at $700bn. Collateral expanded to include municipal debt, providing liquidity to sub-federal institutions. Take up $30bn as of 27/03|
|Primary Market Corporate Credit Facility – SPV that purchases qualifying IG bonds and lends to eligible issuers||N/A||Active, no explicit total limit. Issuer limit expressed as percentage of total issuer bonds and loans depending on credit rating|
|Secondary Market Corporate Credit Facility – purchases of secondary market corporate debt||N/A||Active, no explicit total limit. Issuer limits: 10% of any individual company’s corporate bonds; 20% of any given ETF|
|Term Asset-Backed Loan Facility – facility to meet the credit needs of consumers and small businesses||Active 2008-2010, lending up to $70bn to support ABS market||Active, total volume limited at $100bn|
|Main Street Business Lending Program – joint programme with Small Business Administration expected to support SMEs||N/A||To be determined|
|Central bank swap lines||
Standing swap arrangements with Bank of Canada, BoE, ECB, BoJ, and the SNB. One-week maturity operations offered at OIS+50bps
|Addition of 84-day maturity operations. Rate changed to OIS+25bps. Auctions now held daily.
Addition of temporary swap arrangements with: Australia, Brazil, Denmark, South Korea, Mexico, New Zealand, Norway, Singapore, and Sweden.
Take-up week ending 25/03: $206bn
|Temporary open market operations|
|Repurchase operations||Term repo operations of $25bn/month; overnight repo operations of $100bn/month. Plan to gradually taper these operations through the Spring||Term repo operations of $45bn; overnight repo operations of $500bn. Little take-up, suggests short-term funding markets are in a good liquidity position. March 27: $500bn overnight repo receives no bids|
|Reverse repurchase operations||Standing reverse repurchase facility; take-up $220bn||
Take-up $359bn driven by significant jump in foreign central bank demand
These tables highlight the growth in instruments since 1 March, as well as the nuanced differences between the central banks’ approaches. The Fed’s most significant step has been the (re-) introduction of its lending facilities, while in the ECB’s case, asset purchases have been the most trailblazing element of its policy package.
Importantly, there is still room to do more. Both have still shied away from providing genuinely significant forms of liquidity to non-bank intermediaries. Neither has fully embraced fiscal-monetary cooperation, in any of its manifold potential forms, despite direct fiscal transfers in the US, Australia, and other jurisdictions. There is still significant room for expansion and innovation without jeopardising central bank independence.
Despite these measures and prospects for further action, that central banks remain as the ‘only game in town’ is a worrying prospect. What the critics did get right is that central bank action is nearing providing diminishing returns. The measures the Fed, the ECB and others have introduced have sent an important reassuring message to markets and have helped restore confidence. But for the stimulus to be successful in supporting the real economy, fiscal policy needs to act too.
Danae Kyriakopoulou is Chief Economist and Director of Research at OMFIF. Pierre Ortlieb is Economist at OMFIF.