The Eurosystem responded quickly to the COVID-19 crisis, deploying significant measures to support the provision of financing to the economy through the bank lending and market financing channels. The measures take three forms: credit operations have been adjusted and extended, collateral easing measures have been introduced, and securities purchase programmes have been strengthened.
While health and fiscal policies make up the front-line in the public response to COVID-19, monetary policy is also playing a key role, in particular by maintaining financial sector liquidity whilst ensuring that the real sector, i.e. households, companies and general government, continues to benefit from favourable financing conditions during this period. Beginning in early March, the Eurosystem, which comprises the ECB and euro area national central banks, thus took steps to safeguard the efficient transmission of monetary policy and ward off the risks of financial market fragmentation in the euro area (Table). Other major central banks have done likewise.
The conditions for targeted longer-term refinancing operations (TLTROs) were significantly eased to support lending to the economy. TLTROs, which have been implemented through three series of operations since 2014, are referred to as “targeted” because the amounts that may be borrowed and the applicable rates are tied to the volume of loans to non-financial corporations and households (except for house purchases), so creating an incentive for banks to lend.
On 12 March 2020 (and then again on 30 April 2020), the ECB announced that it was further easing the conditions for the third TLTRO series, which was launched in 2019 (TLTROIII), notably by introducing a special period, running from June 2020 to June 2021, during which the rate on the operations will be reduced to 50 bps below the DFR (i.e. at present -1%). It will also be easier for borrowing banks to obtain the most favourable rates, owing to a reduction in lending targets (Cf. ECB and Banque de France websites for more details).
The Eurosystem also launched a number of new operations:
Following these measures, the outstanding amount of refinancing provided by the Eurosystem in EUR and USD to euro area banks increased significantly, climbing by over EUR 500 billion between mid-March and the end of May to exceed EUR 1,000 billion (Chart) even before the June TLTROIII.
The Eurosystem also introduced collateral easing measures on 7 April 2020, to increase the amount of eligible assets and support bank lending to the whole economy, by:
The Governing Council also decided on 22 April 2020 to mitigate the negative impact of possible rating downgrades by credit rating agencies on collateral availability by freezing the ratings of already eligible marketable assets (securities).
The Eurosystem also supported the market financing channel by substantially stepping up its asset purchase programmes to maintain favourable financing conditions in the euro area:
Purchases under the PEPP also cover the market for commercial paper issued by non-financial corporations to meet their cash requirements more directly.
Purchases will be conducted in a flexible manner (over time, across asset classes and among jurisdictions). Their volume and composition may be adjusted at any time. Furthermore, the limits that the Eurosystem has set in this regard may be reviewed if they hinder the accomplishment of its mandate.
Overall holdings under the Eurosystem’s securities purchase programmes totalled EUR 2,978 billion at end-May, including EUR 235 billion under the PEPP, and are expected to continue to increase substantially in the coming months.