Monetary Policy and Market Operations in the Eurosystem

The Eurosystem, comprised of the European Central Bank and the national central banks of the European Union, is responsible for implementing the European Union’s monetary policy and managing its financial markets. This article examines the detailed modalities for reducing the Eurosystem’s holdings of securities under the Asset Purchase Programme (APP), the risk control framework for collateralized credit operations, the extension of the NextGenerationEU (NGEU) fiscal agent services to financial assistance for Ukraine, and the review of the Agreement on Net Financial Assets (ANFA). It will also discuss the removal of debt instruments issued based on the DG Bank-Umwandlungsgesetz from the list of eligible assets.

Monetary Policy

On 2 February 2023, the Governing Council of the European Central Bank (ECB) decided on the detailed modalities for reducing the Eurosystem’s securities holdings under the APP through the partial reinvestment of the principal payments from maturing securities. This decision was based on the need to adjust the APP holdings to the changing economic conditions in the Euro Area. The related press release is available on the ECB’s website.

Market Operations

The Governing Council of the ECB also adopted several legal acts on 16 December 2022, further to the 2022 review of the ECB’s risk control framework for collateralized credit operations. These included Guideline ECB/2022/48 amending Guideline (EU) 2015/510 on the implementation of the Eurosystem monetary policy framework, Guideline ECB/2022/49 amending Guideline (EU) 2016/65 on the valuation haircuts applied in the performance of the Eurosystem monetary policy framework, and Guideline ECB/2022/50 amending Guideline ECB/2014/31 on additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral. The standards adopted improve the overall consistency of the risk control framework and will apply from 29 June 2023. The related press release is available on the ECB’s website.

The Governing Council also adopted Decision ECB/2022/47 amending Decision (EU) 2019/1743 on the remuneration of holdings of excess reserves and of particular deposits and Decision (EU) 2022/1521 on temporary adjustments to the payment of certain non-monetary policy deposits held with national central banks and the European Central Bank. This change to the ECB’s legal framework followed a request from the European Commission to allow funding to be provided to Ukraine on a structured and predictable basis throughout 2023.

On 19 December 2022, the Governing Council approved amendments to the ANFA that seek to increase the efficiency of related processes while leaving the agreement’s substance unchanged. The revised agreement is available on EUR-Lex.

On 29 December 2022, the Governing Council decided to remove, effective 28 February 2023, the debt instruments issued based on DG Bank-Umwandlungsgesetz from the list of eligible assets. This is because these instruments do not qualify as European Economic Area legislative covered bonds as defined in the General Documentation (Article 2 (24a)) and can no longer be used as collateral as of 1 March 2023. The phasing out was communicated via an update on the ECB’s website.

Related Facts

• Asset Purchase Programme – The Eurosystem’s securities holdings under the APP is designed to reduce borrowing costs and stimulate economic activity in the Euro Area.
• Risk Control Framework for Collateralised Credit Operations – The ECB’s risk control framework for collateralized credit operations is designed to protect the Eurosystem from potential losses when providing liquidity to the financial markets.
• NextGenerationEU – The NGEU is the European Commission’s fiscal agent services provider responsible for providing financial assistance to Ukraine.
• Agreement on Net Financial Assets – The ANFA is an agreement between the ECB and the Euro Area Member States which sets out the conditions under which the Eurosystem can purchase and hold securities issued by the Member States.
• DG Bank-Umwandlungsgesetz – The DG Bank-Umwandlungsgesetz is a German law allowing for issuing debt instruments not eligible for use as collateral in the Eurosystem.

Key Takeaway

The Eurosystem implements the European Union’s monetary policy and manages its financial markets. Accordingly, the Governing Council of the ECB has adopted several legal acts to reduce the Eurosystem’s holdings of securities under the APP, improve the risk control framework for collateralized credit operations, extend the NGEU-related fiscal agent services to the European Commission also to cover the Macro-Financial Assistance plus (MFA+) program for Ukraine, review the ANFA, and remove debt instruments issued based on the DG Bank-Umwandlungsgesetz from the list of eligible assets.

Conclusion

The Eurosystem implements the European Union’s monetary policy and manages its financial markets. Accordingly, the ECB’s Governing Council has taken several steps to ensure that the Eurosystem is connectively managing its financial markets and reducing the risk of potential losses when providing liquidity to the financial markets. These steps include reducing the Eurosystem’s holdings of securities under the APP, improving the risk control framework for collateralized credit operations, extending the NGEU-related fiscal agent services to the European Commission also to cover the MFA+ program for Ukraine, reviewing the ANFA, and removing debt instruments issued based on the DG Bank-Umwandlungsgesetz from the list of eligible assets.