For reasons discussed previously, this post presents and briefly discusses a number of variables pertaining to the activity of the ECB from its inception until now. Particular focus is put on the more recent events of the last quarter and a brief comparison is made with the state of affairs when last I considered any of these variables.
The post is divided in 4 parts:
- First, I consider the ECB’s most orthodox policy tools, the policy rates.
- Secondly, I review the structure of the ECB’s balance sheet.
- This is then followed by a more indepth consideration of the elements pertaining to different forms of direct financial market intervention,
- Lastly, I provide a brief review of the recent developments in Target2 balances.
Following these considerations, I conclude that
- The negative deposit rates introduced recently are probably not triggering the flow of cash onto the economy that was desired.
- Today, the main driver of the balance sheet on the asset side are the government bonds purchased to relief financial pressure, which replaced the long-term borrowing.
- The ELA provided to Greece is quite visible on the assets of the ECB.
- The main liability counterpart to these bond purchases are cash created, bank deposits and revaluation. This means that the ECB is creating money that is not finding its way into the real economy. So inflation fears seem misplaced.
- There is still a lot of scope for ECB intervention in troubled countries. Greece is altogether absent from the PSPP. Portugal represents a very small fraction of the PSPP. The OMT as not been triggered.
- The election of the present Greek government had a clear effect on Target2 balances, but one that is not particularly large overall.
It is my opinion that within the scope of what it can do, the ECB is already doing plenty. It sure can do more and with a clear mandate it could and would do so. But the mandate is necessary and getting it will take a very big crisis.
Having considered some of the inner workings of how commercial and investment banking works from the point of view of (1)Banking intermediation, Fractional Reserve Banking and Bank runs, (2) Asymmetries of Information, Overlending and the Output gap, and (3) Leverage … Continue reading
This post is a long overdue look at the infamous TARGET2 (im)balances, which are yet another symptom of the ongoing malaise in the Euro-Zone. I do not claim to make any new contribution in this post, whose motivation was exclusively … Continue reading
Last Thursday, September 6th, the ECB introduced its new goverment bond purchasing programme, known as the Outright Monetary Transactions (“OMT”). If you are interested in getting the information from the lion’s mouth, you can watch the press conference here,read its transcript here and get the … Continue reading
Update: As of September 6th, 2012, the SMP was discontinued and the assets held in its accounts were transferred assimilated by the Outright Monetary Transactions (OMT) accounts. For a preliminary assessment of the OMT, please check this blog post. Otherwise, … Continue reading
Having looked at the tools available to the ECB, at its balance sheet, and at the transmission of monetary policy into the interbank lending market.after considering financial market failures due to Fractional Reserve Banking, overlending and VaR, I would like … Continue reading