Non-standard monetary policy measures and their ... Materials... · Non-standard monetary policy...

Non-standard monetary policy measures

and their effectiveness in Slovenia

Biswajit Banerjee

Banka Slovenije

Ljubljana, 8 December 2016

2

Contents of the presentation

• Non-standard monetary measures of the Eurosystem

• The effectiveness of non-standard monetary policy

measures in Slovenia

3

Non-standard monetary policy measures

of the Eurosystem

4

What are non-standard monetary policy

measures (NSMs) and why were they

implemented?

• They are called "non-standard" as they are meant to be

temporary in nature and as they deviate from the way

monetary policy was conducted prior to the crisis.

• The non-standard monetary policy measures were motivated

by a need to ensure the continued effectiveness of the

transmission of monetary policy stance in an environment

where the financial system was subject to considerable stress.

• These measures were intended to complement standard

interest rate decisions, rather than substitute them.

5

The effect of NSMs on the transmission

mechanism of monetary policy

• The financial crisis has impaired the channels through which the ECB

official interest rate (MRO) was normally transmitted to the economy and

consequently to prices.

• Together with providing liquidity and thus lowering market tensions, the

aim of NSMs is therefore to enhance the effectiveness of the transmission

mechanism by affecting market expectations with firming the

accommodative monetary policy stance.

• Transmission mechanism in times of crisis:

– official (MRO) interest rate ↓ (enhanced by NSMs) interbank interest rates

decrease ↓ lending rates ↓ (investments & consumption ↑), euro exchange

rate ↓ total demand & wages ↑ inflation ↑

6

Grouping of non-standard monetary policy

measures

Group 1:Refinancing operationsExtension of maturity of liquidity-providing operations at fixed rate full allotment

- full allotment of banks' demands for central bank liquidity at fixed rates (FRFA); - refinancing operations with longer maturities (LTROs): 1M, 3M, 6M and 12M;- VLTROs (3Y), TLTROs (up to 4Y), TLTRO-II

Group 2:Currency swap arrangements

- foreign currency swaps in USD and CHF- USD liquidity-providing operations against eligible collateral

Group 3:Collateral requirements

- extension of the list of assets accepted as collateral- adjustment of quality threshold for particular asset classes

Group 4:Securities purchase programmes

- CBPP1, CBPP2- Securities Markets Programme (SMP), Outright Monetary Transactions (OMT; not used)- EAPP: CBPP3, ABSPP, PSPP, CSPP

Group 5:Introducing negative deposit rate and forward guidance

-negative deposit facility rate and negative remuneration of excess reserves- forward guidance

7

Non-standard monetary policy measures:

chronology with key underpinnings / goals

• Phase 1 - Addressing the global financial and liquidity crisis (October 2008 - April

2010):

Non-standard measures aimed at improving bank financing conditions and addressing specific market

impairments.

• Phase 2 - Addressing the sovereign crisis and fragmentation (May 2010 – 2013):

Non-standard measures aimed at addressing market segmentation and restoring impaired functioning

of transmission mechanism.

In phases 1 & 2, the increase of Eurosystem balance sheet was mainly exogenous and a consequence of banks' need for liquidity and their drawing of lending operations.

• Phase 3 – Increasing monetary stimulus for enhancing transmission mechanism

and securing price stability (2013 ):

Non-standard measures aimed at actively increasing monetary stimulus by introducing further balance

sheet measures in the context of de-anchored inflation expectations and zero lower bound

environment.

In phase 3, the Eurosystem made a shift to an active use of balance sheet to increase

the monetary base and influence inflation and ultimately lending through various

channels (for example through portfolio rebalancing, bringing down risk premia,

increasing risk taking, flattening yield curve, signalling, shifting expectations).

8

Classification of NSMs by the phases of their

introduction (I)

Phase 1: Addressing global financial and liquidity crisis, Phase 2: Addressing sovereign crisis and fragmentation, Phase 3: Increasing

monetary stimulus to secure price stability. Orange bars indicate that NSMs were being conducted (e.g. operations) or were in effect

(e.g. FRFA, collateral measures) in specific quarter.

9

Classification of NSMs by the phases of their

introduction (II)

• FRFA – Fixed Rate Full Allotment

• LTRO – Long-Term Refinancing Operation

• VLTRO – Very Long-Term Refinancing Operation

• TLTRO – Targeted Long-Term Refinancing Operation

• ACC – Additional Credit Claims

• CBPP – Covered Bond Purchase Programme

• SMP – Securities Market Programme

• OMT – Outright Monetary Transactions

• APP – Asset Purchase Programme

• EAPP – Extended Assest Purchase Programme

• ABSPP – Asset-Backed Securities Purchase Programme

• PSPP – Public Sector Purchase Programme

• CSPP – Corporate Sector Purchase Programme

10

Eurosystem's balance sheet expanded significantly with

the introduction of the EAPP in 2015

Liquidity creation sharply increased in 2012 with the VLTROs and TLTROs, average maturity of Eurosystem operations was significantly prolonged. In 2015 the

liquidity creation again sharply increased due to introduction of additional purchase programes (ABSPP, CBPP3, PSPP, CSPP).

2008 2009 2010 2011 2012 2013 2014 2015 2016-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

bn EUR

main refinancing operations LTROs VLTROs

TLTROs TLTROs-II purchase programmes

bank reserves autonomous factors (net) marginal deposit facility

fine-tuning operations (net)

Eurosystem liquidity-providing and liquidity-absorbing operations

LTROsPurchase

programmes

VLTRO liquidity

injectionVLTRO early

repayments TLTROs

asset

side

TLTROs-II

liabilities

side

Source: Eurosystem.

11

Money aggregate M3, loan growth and money

multiplier

-6

-4

-2

0

2

4

6

8

10

12

14

16

-6

-4

-2

0

2

4

6

8

10

12

14

16

01

.01

.20

07

01

.07

.20

07

01

.01

.20

08

01

.07

.20

08

01

.01

.20

09

01

.07

.20

09

01

.01

.20

10

01

.07

.20

10

01

.01

.20

11

01

.07

.20

11

01

.01

.20

12

01

.07

.20

12

01

.01

.20

13

01

.07

.20

13

01

.01

.20

14

01

.07

.20

14

01

.01

.20

15

01

.07

.20

15

01

.01

.20

16

01

.07

.20

16

Money growth and loans in euro area

Adjusted loans to NFCs - y-o-y growth M3 - y-o-y growth

4

6

8

10

12

14

16

19

99

-02

19

99

-10

20

00

-06

20

01

-02

20

01

-10

20

02

-06

20

03

-02

20

03

-10

20

04

-06

20

05

-02

20

05

-10

20

06

-06

20

07

-02

20

07

-10

20

08

-06

20

09

-02

20

09

-10

20

10

-06

20

11

-02

20

11

-10

20

12

-06

20

13

-02

20

13

-10

20

14

-06

20

15

-02

20

15

-10

20

16

-06

euro area M3 money multiplier*

euro area M3 money multiplier

Sources:ECB, Bank of Slovenia calculations*Note: calculated as broad M3 money/base money

12

Sovereign bond yields have declined

significantly since mid 2012

2008 2009 2010 2011 2012 2013 2014 2015 2016

-5

0

5

10

15

20

25

30

35

-5

0

5

10

15

20

25

30

35

%

SI DE IT SK PT GR

CBPP1 SMP

CBPP2

OMT EAPP1st & 2nd

VLTRO CSPP

10- year government bond yields

Source: Bloomberg

13

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

ECB MRO rate euribor 3m

ECB MRO rate and 3m Euribor

Source: ECB.

Policy and market rates are at record lows

ECB MRO rate at 0,00%

ECB MRO rate at 0,05%

14

Monetary policy was effective in filling the liquidity /

funding gap of banking sector after shutdown of wholesale

markets via FRFA, VLTROs, TLTROs and EAPP.

Note: Excess liquidity = Excess reserves in banks' accounts or placed with the Eurosystem

Source: ECB, Bank of Slovenia. Bank of Slovenia calculations.

Excess liquidity in euro area (relative to required reserves)

0%

200%

400%

600%

800%

1,000%

1,200%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Euro area excess liquidity

Crisis begins VLTRO OMT BAMC TLTRO EAPP

15

Lending standards in euro area are easing

0

1

2

3

4

5

6

08 09 10 11 12 13 14 15 16

0

1

2

3

4

5

6

Euro area*

Cumulated net percentage change over the last three months

BLS: Levels of credit standards for NFC

Note: *Weighted net percentage change over the last three months.Source: ECB.

16

Bank lending rates are decreasing

-1

0

1

2

3

4

5

6

7

8

31.0

1.20

07

31.0

1.20

08

31.0

1.20

09

31.0

1.20

10

31.0

1.20

11

31.0

1.20

12

31.0

1.20

13

31.0

1.20

14

31.0

1.20

15

31.0

1.20

16

-1

0

1

2

3

4

5

6

7

8

euro area - up to 1 year (up to 1 mio EUR)euro area - 1 to 5 years (up to 1 mio EUR)euribor 3 months

Interest rates on loans to NFCs

Sources: ECB

%

17

Spread between lending and deposit rates in

euro area

07 08 09 10 11 12 13 14 15 16

0

1

2

3

4

5

6

7

margins

lending rates

deposit rates

Euro area; on new business (NFC and Households)

Source: ECB.

18

Developments in credit growth to private sector

in euro area

-4

-2

0

2

4

6

8

10

12

07 08 09 10 11 12 13 14 15 16

-4

-2

0

2

4

6

8

10

12loans to the private sector

Source: ECB.

MFI loans to the private sector in EA

annual percentage changes

-10

-5

0

5

10

15

20

07 08 09 10 11 12 13 14 15 16

-10

-5

0

5

10

15

20

loans to households

loans to non-financial corporations

Source: ECB.

MFI loans to households and non-financial corporations in EA


19

Notwithstanding NSMs, inflation and inflation expectations

continued to decline

Market developments

in H2 2014 already

significantly

influenced by strong

expectations of EAPP

However, core

inflation and inflation

expectations

continued to decline

with the exception of

the period after the

EAPP was actually

announced.

Source: Bloomberg.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

jan.

apr.

jul.

oct.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

%%

EUR 5y5y Inflation Swap Forward

Eurozone Core Inflation YoY (rhs)

Mr. Draghi's speech in

Jackson Hole

EAPP announcement

EAPP extension

EAPP expansion and CSPP announcement

20

Bank profitability developments in euro area

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Return on assets (in %)

Net interest income

Impairment costs

Non-interest income

Source: ECB.

Bank profitability in the euro area

as % of assets

21

The effectiveness of non-standard

monetary policy measures in Slovenia

22

10 year government bond yield and spread in

Slovenia

01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015 01.01.2016

0

50

100

150

200

250

300

350

400

450

500

550

600

650

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

5,5

6

6,5

7

7,5

spread over DE10y (rhs)

SI

CBPP1 SMP

CBPP2

OMT EAPP1st & 2nd

VLTRO CSPP

10- year SI government bond yield (in %) and spread over 10 year DE bond yield (in bps)

Source: Bloomberg

23

ECB's Monetary policy was effective in filling the liquidity

banking sector with FRFA, VLTROs, TLTROs and EAPP.



Excess liquidity in Slovenia (relative to required reserves)

0%

200%

400%

600%

800%

1,000%

1,200%

1,400%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

SI excess liquidity


24

ECB's Monetary policy was effective in filling the liquidity

banking sector with FRFA, VLTROs, TLTROs and EAPP.



Excess liquidity in Slovenia (relative to required reserves)

0%

200%

400%

600%

800%

1,000%

1,200%

1,400%

0%

200%

400%

600%

800%

1,000%

1,200%

1,400%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

SI excess liquidity

Euro area excess liquidity


25

Participation in the TLTROs and 1st TLTRO-II

Notes: 1) In eur billion for the Eurosystem and in eur million for Slovenia

2) For 1st and 2nd TLTRO, allotment was limited by the initial allowance (7% of eligible outstanding loans as at 30 April 2014). For 3rd-8th

TLTRO, additional allowance applied which was based on individual bank's lending data. For all TLTRO-II operations, aggregate participation of

individual bank is limited to 30% of the banks' eligible outstanding loans as at 30 January 2016.

1. TLTRO

(18.9.2014)

2. TLTRO

(11.12.2014)

3. TLTRO

(26.2.2015)

4. TLTRO

(28.5.2015)

5. TLTRO

(3.9.2015)

6. TLTRO

(23.11.2015)

7. TLTRO

(3.3.2016)

8. TLTRO

(2.6.2016)Total

1. TLTRO-II

(19.5.2016)

Allotment in

Eurosytem (*in eur

billion)

266.461 183.859 403.125 694.75 694.723 737.171 846.439 924.829 1072.992

Allotment in

Eurosytem (*in eur

billion)

82.602 129.84 97.848 73.789 15.548 18.304 7.342 6.724 431.997 399.289

Initial allowance /

additional allowance

(*in eur million)

960.71 885.21 1105 1445 1150 919 1111 730 3319

Allotment in

Slovenia (*in eur

million)

75.5 630.88 25 0 10 10 0 0 751.38 338

Eurosystem's early

repayments 29.6.2016

(*in eur billion)

72.934 114.484 76.574 67.923 14.215 17.838 3.895 367.863

Slovenia's early

repayments 29.6.2016

(*in eur million)

37.5 550.88 0 0 10 0 0 598.38

26

Implementation of PSPP in Slovenia

• After the increase in the total PSPP volume in March 2016 to EUR 80 bn, Slovenian government bond

purchases amount to approx. EUR 210 mln per month (cumulatively approx. EUR 6.5 bn from March

2015 until March 2017; according to the BS capital key of 0.4937%)

‒ as of end of August 2016, EUR 0.8 bn of SI government bonds is currently available after taking into

account issue/issuer limits and past PSPP purchases.

‒ under the assumption of approx. EUR 3 bn new issuance of SI government bonds until March 2017, it

is envisaged that Banka Slovenije will substitute the deficit of SI government bonds of approx. EUR

0.7 bn with supranational bonds.

‒ Purchases in line with plan so far, with the monthly quota of purchases successfully fulfilled.

‒ 90% purchased from foreign institutions

• Estimated holdings of Slovenian government bonds:

27% domestic investors

39% non-domestic investors from EMU

34% foreign investors outside EMU

• Anecdotal evidence from Slovenian banks: limited willingness to sell SI bonds

– large excess liquidity

– lack of available alternative investments in low-yield environment

– risk-averse investment policy

– aversion to negative yields

27

Lending standards in Slovenia are easing as

well

0

1

2

3

4

5

6

7

8

9

10

08 09 10 11 12 13 14 15 16

0

1

2

3

4

5

6

7

8

9

10

Slovenia




28

Lending standards in Slovenia are easing as

well

0

1

2

3

4

5

6

7

8

9

10

08 09 10 11 12 13 14 15 16

0

1

2

3

4

5

6

7

8

9

10

Slovenia

Euro area*




29


-1

0

1

2

3

4

5

6

7

8

31.0

1.20

07

31.0

1.20

08

31.0

1.20

09

31.0

1.20

10

31.0

1.20

11

31.0

1.20

12

31.0

1.20

13

31.0

1.20

14

31.0

1.20

15

31.0

1.20

16

-1

0

1

2

3

4

5

6

7

8

Slovenia - up to 1 year (up to 1 mio EUR)Slovenia - up to 1 year (up to 1 mio EUR)euribor 3 months


Sources: ECB

%

30


-1

0

1

2

3

4

5

6

7

8

31.0

1.20

07

31.0

1.20

08

31.0

1.20

09

31.0

1.20

10

31.0

1.20

11

31.0

1.20

12

31.0

1.20

13

31.0

1.20

14

31.0

1.20

15

31.0

1.20

16

-1

0

1

2

3

4

5

6

7

8

euro area - up to 1 year (up to 1 mio EUR)euro area - 1 to 5 years (up to 1 mio EUR)euribor 3 monthsSlovenia - up to 1 year (up to 1 mio EUR)Slovenia - 1 to 5 years (up to 1 mio EUR)


Sources: ECB

%

31

Spread between lending and deposit rates in

Slovenia

07 08 09 10 11 12 13 14 15 16

0

1

2

3

4

5

6

7

8

margins

lending rates

deposit rates

Slovenia; on new business (NFC and Households)

Source: ECB.

32

The speed of contraction of loans to NFCs in Slovenia reversed in 2015 and

2016, however is still negative, while loans to households started to expand in

late 2015 and continue to grow in 2016.

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

07 08 09 10 11 12 13 14 15 16

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40loans to households


Source: ECB.

MFI loans to households and non-financial corporations in Slovenia


-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

07 08 09 10 11 12 13 14 15 16

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40


Source: ECB.

MFI loans to households and non-financial corporations in Slovenia


33

Slovenian banks keep their credit standards

tightened despite of picking up in demand.

-9.0

-6.0

-3.0

0.0

3.0

6.0

9.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-9.0

-6.0

-3.0

0.0

3.0

6.0

9.0

Level of credit standards - Slovenia

Level of credit standards - EA

Level of demand for loans - Slovenia

Level of demand for loans - EA

Source: ECB.

Demand and supply of loans to NFC

cumulated net percentage changes

Crisis begins

34

In Slovenia, banks have been deleveraging since the

beginning of the crisis, notwithstanding the NSMs.

80

90

100

110

120

130

140

150

160

170

180

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

80

90

100

110

120

130

140

150

160

170

180

Euroarea

Slovenia

Germany

Source: ECB.

Loan-to-deposit ratio

35

Bank profitability developments in Slovenia

-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Return on assets (in %)

Net interest income

Impairment costs

Non-interest income

Source: ECB.

Bank profitability in Slovenia

as % of assets

36

Recovery in loans was limited by high degree of

NPLs during the financial crisis

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

1

2

3

4

5

6

7

8

9

NPLs in EUR billions (left)

NPLs in % of total claims

Non-performing loans

Source: Bank of Slovenia.

Transfer to BAMC

37

Enterprises are still deleveraging in Slovenia

40

60

80

100

120

140

2009 2010 2011 2012 2013 2014 2015 2016

40

60

80

100

120

140

SI FR PT ES EA DE

Source: ECB.

%

* Debt is calculated as loans+debt securities.

Cross country comparison of firms' debt to GDP ratio*

40

60

80

100

120

140

160

180

2009 2010 2011 2012 2013 2014 2015 2016

40

60

80

100

120

140

160

180

SI PT ES DE HU FR

Source: ECB, BoS calculations.

%

* Securities other than shares, loans and other accounts payable.

Cross country comparison of NFCs debt* to equity ratio

38

… however, profits are rising…

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2008 2009 2010 2011 2012 2013 2014 2015

Total profit of firms*

Source: AJPES, Bank of Slovenia calculations.*Note: Earnings before taxes (EBT) of firms and self entrepreneurs

in EUR billion

72 %

31 %

68 %

without two bigger electric power industry firms

39

… while firms borrow and finance from non-

bank sources and abroad

0

5

10

15

20

25

30

35

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015 2016

share of foreign loans in total loans of NFCs (rhs)NFCsbanksinternational institutions

Stock of foreign loans to NFCs according to sector of foreign creditors

EUR billion %

Note: 2011 - large transaction between foreign owner and Slovenian real estate companies; 2013 - large loan of two international institutions for TEŠ6; 2014 and 2015 - two large transactions each year with two foreign companies.Source: Bank of Slovenia.

-4000

-2000

0

2000

4000

6000

8000

10000

09 10 11 12 13 14 15 16

-4000

-2000

0

2000

4000

6000

8000

10000

retained earningsinvestmentnet lending(+)/net borrowing(-)

Source: Banka Slovenije, Eurostat, SORS.

NFC investment and retained earnings

sum of quarterly flows, mio €

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