Forecasting liquidity and conducting credit operations

Irene Katsalirou Money Market and Liquidity Division Directorate General Market Operations

ECB Central Banking Seminar Frankfurt am Main, 4 July 2019

ECB-PUBLIC

Rubric

www.ecb.europa.eu

Overview

1

2

3

Forecasting liquidity and conducting credit operations

Recent and future liquidity developments

Liquidity management concept and main components

ECB-PUBLIC

2

Rubric

www.ecb.europa.eu

Integrated structure

Focus on liquidity management and operations

ECB-PUBLIC

3

Liquidity management • Compilation and publication of

liquidity data for Eurosystem: (i) Current accounts; (ii) Standing facilities and (iii) Autonomous factors

• Analysis of liquidity data/distribution

Operations • Standard and non-standard • Analysis & input for design • Repayments • USD liquidity providing

operations • FX swap lines (USD, JPY,

CAD, GBP, CHF, CNY…)

Money Market Monitoring • Market monitoring and analysis • Market Intelligence • NCBs & non euro area CBs • EONIA calculating agent/€STR

administrator • €STR and RFR working group • Money market survey and MMSR

Rubric

www.ecb.europa.eu

Liquidity management is closely related to interest rate management

Managing day-to-day liquidity to steer interest rates

Overnight interest rate

Policy rate

Marginal lending facility

Deposit facility

Liquidity supply Eurosystem

Liquidity demand banks

Autonomous factors

Excess reserves

LTRO**

FTO***

Open market ops

Required reserves

*Main Refinancing Operation, **Longer-term Refinancing Operation, ***Fine-tuning Operation

MRO*

ECB-PUBLIC

4

Rubric

www.ecb.europa.eu 5

OPEN

MARKET

OPERATIONS

Standard Tender

Quick Tender & Bilateral Operation •non standardised maturity •no regular frequency

MRO weekly

1-week maturity

LTRO

Fine Tuning

Structural Operation

Liquidity Providing Liquidity Absorbing

STANDING

FACILITIES

•Access at the discretion of counterparties •Overnight maturity

Marginal Lending Facility

Deposit Facility

Overview of monetary policy tools

Reverse Transaction

FX Swaps

Reverse Transaction FX Swaps

Fixed Term Deposit

Reverse Transaction Outright purchases

Issuance of Debt Certificates;

Outright Sales

Reverse Transaction

Deposit

Reverse Transaction

Reverse Transaction

5

ECB-PUBLIC

Rubric

www.ecb.europa.eu

Eurosystem simplified balance sheet

Liquidity demand and supply from a balance sheet perspective ECB-PUBLIC

6

Assets Liabilities

Monetary policy operations Reverse open market operations Marginal lending facility Securities held for monetary policy purposes

Monetary policy operations Deposit facility

Autonomous factors Net assets denominated in euro Net foreign assets

Autonomous factors Banknotes in circulation Government deposits Other autonomous factors (net)

Current account holdings Minimum reserve requirements Excess reserves

Intra-Eurosystem claims Intra-Eurosystem liabilities

Rubric

www.ecb.europa.eu

Liquidity demand: Reserve requirements

What are they? • Create/enlarge structural liquidity deficit (of the banking sector) stabilise

money market rates

• Need to be fulfilled on average over the reserve maintenance period

ECB-PUBLIC

7

165

170

175

180

185

190

195

200

205

210

1 4 7 10 13 16 19 22 25 28

EUR bn

Days in MP

Daily Current Accounts Reserve Requirement

Rubric

www.ecb.europa.eu

Liquidity demand: Excess reserves

What are they? • Reserve holdings in excess of minimum reserve requirements. • Remuneration rate = Minimum of 0% or the ECB Deposit Facility

rate (currently -0.40%)

Why are they needed? • Payment needs of counterparties not subject to minimum

reserve requirements • Banks with an effective reserve requirement of zero • Counterparties which are not credit institutions • Foreign credit institutions

• Banks that have already fulfilled their reserve requirements • Individual liquidity shocks after markets close • Regulatory motives

ECB-PUBLIC

8

Rubric

www.ecb.europa.eu

Autonomous factors

What are they?

Sum of all items on a central bank’s balance sheet that are not related to monetary policy operations or current account holdings of counterparties held with the central bank Which are they? The main Autonomous Factors are:

1. Banknotes in circulation 2. Government deposits 3. Net Foreign Assets 4. Net Assets Denominated In Euro 5. Items in course of settlement 6. Other Autonomous Factors

ECB-PUBLIC

9

Rubric

www.ecb.europa.eu

Developments in main Autonomous Factors since 2015

10

Autonomous factors ECB-PUBLIC

Rubric

www.ecb.europa.eu

Intra-week

574

574.5

575

575.5

576

576.5

mon tue wed thu fri sat sun

day of the week

bank

note

s in

EU

R b

n

Banknotes forecasting

573

573.5

574

574.5

575

575.5

576

576.5

577

577.5

578

day1

day 2

day 3

day 4

day 5

day 8

day 9da

y 10da

y 11da

y 12da

y 15da

y 16da

y 17da

y 18da

y 19da

y 22da

y 23da

y 24da

y 25da

y 26da

y 29da

y 30

day of the month

bank

note

s in

EUR

bn

550

555

560

565

570

575

580

585

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

monthba

nkno

tes

in E

UR

bn

E as ter

S ummer holidays

C hris tmas

Intra-month

Intra-year

Banknotes forecasts can be impacted by seasonal volatility

ECB-PUBLIC

11

Rubric

www.ecb.europa.eu 12

Banknotes time series

Banknotes in circulation across the Eurosystem have displayed an upward trend, however trends differ in individual countries

ECB-PUBLIC

0

200

400

600

800

1000

1200

1400EUR bn

Banknotes Developments: 2007 - present

Eurosystem banknotes in circulation

400

450

500

550

600

650

700

-50

0

50

100

150

200

250EUR bnEUR bn

Banknotes developments in selcted countries

ES FR GR IT PT DE (rhs)

Rubric

www.ecb.europa.eu

Government deposit forecasting

• Data series consist of hundreds of accounts: – Treasury accounts, – Social security funds – Local / Regional authorities

• Very large inflows and outflows during the day

• In some NCBs, end-of-day balances usually small, but can be significant in other NCBs

• Importance of information from the national Treasuries and daily bilateral contacts

• Negative rates have increased the volatility of government deposits, making them difficult to forecast

ECB-PUBLIC

13

Rubric

www.ecb.europa.eu 14

Government deposits evolution: 2012 - present

Government deposits exhibit volatility and can be difficult to forecast in certain jurisdictions

ECB-PUBLIC

0

50

100

150

200

250

300

350

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

EUR bn Government deposits: 2012 - present

Total Euroaystem government deposits

Rubric

www.ecb.europa.eu

Forecasting NFA and NADIE

• Net Foreign Assets (NFA) transactions:

• Related to management of FX reserves / gold • FX trading on behalf of international organisations • Payment to purchase FX on behalf of governments • Related to IMF • During the crisis: USD repos, special lending agreements

• Net Assets denominated in Euro (NADIE) transactions:

• Investment operations • Reserve management services • Time deposits accounts for foreign central banks • During crisis: USD repos, special lending agreements, foreign

exchange swaps

ECB-PUBLIC

15

Rubric

www.ecb.europa.eu

Non-monetary policy deposits increased significantly and exhibit volatility especially around the banks’ balance sheet reporting days

16

Developments in non-monetary policy deposits

-2.4

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

0

100

200

300

400

500

600

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

% EUR Bn

Other liabilities (L5.2) Liabilities to non-euro area res. (L6)

ECB DFR (rhs) RepoFund EU (rhs)

ECB-PUBLIC

Rubric

www.ecb.europa.eu

Publication of the daily liquidity data • On a daily basis, the ECB publishes figures on liquidity conditions, autonomous

factors and outstanding market operations • Data is published to the ECB website via the ECB’s Market Information

Dissemination (MID) system https://www.ecb.europa.eu/mopo/liq/html/index.en.html

• Wire services pick data up from MID

ECB-PUBLIC

17

Rubric

www.ecb.europa.eu

Banks can calculate liquidity needs

• Expected liquidity conditions in the euro area during a given MRO week can be estimated using the weekly estimation of the average autonomous factors

• This allows counterparties to estimate their liquidity needs • The higher the autonomous factors, the lower the expected liquidity

ECB-PUBLIC

18

Rubric

www.ecb.europa.eu

Liquidity supply: Benchmark calculation

Concept • Benchmark amount = MRO allotment amount that would create neutral

liquidity conditions (demand=supply) for the next MRO period (7-days) • Benchmark amount would allow for a smooth fulfilment of the reserve

requirements MRO benchmark calculation Future liquidity needs during upcoming MRO period • Liquidity already provided through other operations during MRO week

(e.g. LTRO) • Accumulated liquidity imbalance so far in the maintenance period

For further information see http://www.ecb.int/mopo/implement/omo/pdf/How_to_calculate_the_benchmark.pdf

ECB-PUBLIC

19

Rubric

www.ecb.europa.eu 20

Liquidity management from the ECB perspective

The ECB also performs liquidity management tasks on a weekly and per MP basis Weekly tasks:

Monday Calculation of benchmark for

inclusion in MRO announcement

Estimate of AFF created and

publish via MID

Tuesday Re-calculate

benchmark for inclusion in MRO

allotment

Calculate new estimate of AFF and publish via

MID

ECB-PUBLIC

Rubric

www.ecb.europa.eu

Liquidity supply: LiCo allotment proposal and decision

Discussion and proposal by the Liquidity Committee (LiCo) • Two Executive Board members in charge of Directorate General

Market Operations (DG-M), Directorate General Economics (DG-E) • Management and Experts from DG-E and DG-M

Basis for discussion • Financial market review and market view on liquidity (DG-M) • Economic review (DG-E) • Integrated reporting on money market and liquidity

developments. Liquidity situation evaluation (DG-M) • Allotment result: special interest in bidding behaviour (DG-M)

(Broad based) recommendation from LiCo to the Executive Board

Final allotment decision by Executive Board

ECB-PUBLIC

21

Rubric

www.ecb.europa.eu

MRO allotments aim to establish

Liquidity supply: MRO allotment before the crisis

• Neutral conditions at the end of the maintenance period • Smooth fulfilment of reserve requirements during the period

ECB-PUBLIC

22

165

170

175

180

185

190

195

200

205

210

11-Jul-07 18-Jul-07 25-Jul-07 01-Aug-07

EUR bn Daily Current Accounts Reserve Requirement

Rubric

www.ecb.europa.eu

Fine-tuning operation on last day of MP steers rates

Liquidity supply: Fine-tuning operation

• Such that EONIA = mid point of corridor = MRO/policy rate

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

%

Days in MP

Marginal lending rate Overnight rate Minimum bid rate Deposit facility rate

Start of MP End of MP1st MRO 2nd MRO 3rd MRO 4th MRO

ECB-PUBLIC

23

Rubric

www.ecb.europa.eu

3. Open market credit operations

Main refinancing operation, MRO (1w)

Long-term refinancing operations, LTRO (3m)

Fine tuning operations (o/n -1w)

2. Standing facilities

Marginal lending Deposit

1. Minimum reserve requirement Monetary policy tools

Additional lending operations (O/N, VLTRO, TLTRO, EUR, USD, CHF)

4. Outright asset purchases

CBPP1-3 SMP OMT

PSPP ABSPP CSPP

Unconventional tools added during the crisis

Front-loading of liquidity provision Fixed-Rate Full Allotment Forward Guidance

Negative rates

ECB-PUBLIC

24

Rubric

www.ecb.europa.eu

Excess liquidity stands at EUR 1.9 trillion The gradual increase in excess liquidity used to be mainly driven by APP and TLTRO-II Autonomous factors developments have contributed towards a partial offset of excess liquidity growth Currently, after entering the reinvestment phase of APP, excess liquidity remains stable around EUR 1.9 trillion

Review of recent liquidity developments

25

ECB-PUBLIC

-1550

-1050

-550

-50

450

950

1450

1950

2450

2950

3450EUR bn

Liquidity-providing reverse transactions + MLF

Monetary Policy Portfolios Excess Liquidity Autonomous Factors

Rubric

www.ecb.europa.eu

Excess liquidity and impact on short-term money market rates

26

EONIA has drifted towards the ECB Deposit Facility Rate as excess liquidity increased

ECB-PUBLIC

-1

0

1

2

3

4

5

-1000

-500

0

500

1000

1500

2000

%EUR bn

Excess liquidity MRO rate EONIA DFR rate

Rubric

www.ecb.europa.eu

Eurosystem liquidity management did not change

• Significant preferences for frontloading reserves Demand for liquidity at MRO rate normally exceeded liquidity needs

• Fixed rate full allotment and liquidity surplus brought short-term interest rates to the level of the ECB Deposit Facility Rate

• In this environment, liquidity demand function is driven by factors not mechanically related to liquidity needs benchmark allotment less relevant

• MRO benchmark is negative (i.e. excess liquidity)

• Focus is on excess liquidity analysis, e.g. on distribution of excess liquidity

But liquidity management processes and forecasting techniques did not change

ECB-PUBLIC

27

Rubric

www.ecb.europa.eu

Future liquidity developments

What will influence the level of excess liquidity going forward?

Fixed Rate Full Allotment - Standard tenders will be conducted as FRFA ‘for as long as necessary, and at least

until the end of the last reserve maintenance period starting in March 2021’

APP reinvestments - the Governing Council intends to continue reinvesting, in full, the principal payments

from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Autonomous Factors developments may continue to offset excess liquidity growth - Government deposits likely to remain elevated in current market conditions - Banknotes likely to be impacted by financial developments

TLTRO-II voluntary early repayments - Voluntary early repayments of funds borrowed in TLTRO-II may exert downward

pressure on excess liquidity levels

TLTRO-III - Take-up in TLTRO-III (commencing in September 2019) will impact excess liquidity

levels

ECB-PUBLIC

28

Rubric

www.ecb.europa.eu

Questions ?

Thank you for your attention!

ECB-PUBLIC

29