Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
The ECB and the crisis: what are the lessons? Lucrezia Reichlin London Business School and CEPR London School of Economics 20 November 2013 Outline • What is special about the ECB? • How much did the specific characteristics of the euro area framework limit its effectiveness during the crisis? • Is there a general lesson beyond the experience of the euro area? What is special about the ECB ? • No fiscal backing • Limitation of mandate • No supervisory responsibilities until recently ECB action TWO PHASES: 1. Global financial crisis 2008 2. Sovereign crisis and second recession 2011 PHASE 1 1. Global financial crisis 2008 • characterized by “sudden stop” involving inter-bank transactions with non domestic financial institutions (run on the foreign part of inter-bank market – stable retail) • ECB acts as a liquidity provider of last resort through the banking sector THE ECB RESPONSE: MARKET OPERATION APPROACH TO LENDER OF LAST RESORT While the ECB has not adopted the rhetoric of “quantitative easing”, it has expanded its balance sheet, increasing reserves on the liabilities side against (largely) conventional assets (repos) on the asset side • Liability side: allow increasing recourse to deposit facilities • Asset side: expand scope of repo operations The ECB largely dealt with banks by applying the pure version of the Bagehot rule ECB was the most conventional but also the most aggressive of the central banks 1998W53 1999W16 1999W32 1999W48 2000W12 2000W28 2000W44 2001W08 2001W24 2001W40 2002W04 2002W20 2002W36 2002W52 2003W16 2003W32 2003W48 2004W12 2004W28 2004W44 2005W07 2005W23 2005W39 2006W03 2006W19 2006W35 2006W51 2007W15 2007W31 2007W47 2008W11 2008W27 2008W43 2009W07 2009W23 2009W39 2010W02 2010W18 2010W34 2010W50 2011W14 2011W30 2011W46 2012W10 2012W26 2012W42 2013W06 Euro Bn THE SIZE OF THE LTRO - PROVIDING BANKS WITH LIQUIDITY 1400 1200 1000 LTRO1: up to one year maturity 800 600 400 200 0 Main refinancing operation Source: ECB Longer-term refinancing operations ECB INTERMEDIATION: THE EA, THE US AND THE UK 35 30 Total assets as % of GDP US 25 Eurozone UK 20 ~X2.0 15 10 ~X3.0 5 0 00 01 02 03 04 05 06 07 08 09 Source: National Sources, GS Global ECS Research As of end of January 2012 (using 2011 GDP figures) Source: GS Global ECS Research 10 11 12 Robustness of the framework: what have we learned? • At the inception of the euro some questioned the robustness of the framework • Would have the ECB been capable of act in response to a financial crisis? Tommaso Padoa Schioppa 2003: ``the framework is in place to act as a liquidity provider: market operation approach to lender of last resort’’ INDEED THIS WORKED 1/2/2007 2/19/2007 4/10/2007 5/29/2007 7/16/2007 8/31/2007 10/18/2007 12/5/2007 1/25/2008 3/13/2008 5/5/2008 6/20/2008 8/7/2008 9/24/2008 11/11/2008 12/31/2008 2/18/2009 4/7/2009 5/28/2009 7/15/2009 9/1/2009 10/19/2009 12/4/2009 25/01/2010 12/03/2010 29/04/2010 16/06/2010 03/08/2010 20/09/2010 05/11/2010 23/12/2010 09/02/2011 29/03/2011 18/05/2011 05/07/2011 22/08/2011 07/10/2011 24/11/2011 12/01/2012 29/02/2012 19/04/2012 07/06/2012 25/07/2012 11/09/2012 29/10/2012 14/12/2012 05/02/2013 25/03/2013 Symptoms : stabilization in 2nd part of 2009 money market rates and spreads 6.000 2.000 5.000 1.800 1.600 4.000 1.400 3.000 turmoil Source: European Banking Federation Lehman Spread (right) “Greek crisis” EURIBOR 3m contagion 2.000 1.000 -1.000 EUREPO 3-months 1.200 1.000 0.800 0.600 0.400 0.000 0.200 0.000 United States NBER recessions dates Euro area (17 countries) CEPR recessions dates Q1-2013 Q4-2012 Q3-2012 Q2-2012 GDP growth, QoQ Q1-2012 Q4-2011 Q3-2011 Q2-2011 Q1-2011 Q4-2010 Q3-2010 Q2-2010 Q1-2010 Q4-2009 Q3-2009 Q2-2009 Q1-2009 Q4-2008 Q3-2008 Q2-2008 Q1-2008 Q4-2007 Q3-2007 Q2-2007 Q1-2007 Q4-2006 Q3-2006 Q2-2006 Q1-2006 RECOVERY IN 2009Q2 Source: OECD 1.5 1 0.5 0 -0.5 -1 -1.5 -2 -2.5 -3 -3.5 OVERALL CONCLUSIONS OF QUANTITATIVE ANALYSIS: ECB NON STANDARD POLICIES 2008:9-2011:4 • Rapid and effective response to a liquidity crisis. Followed the Bagheot rule: providing unlimited liquidity against collateral • Financial stability function: avoided the melt-down • Monetary policy function: some macro effects (see various papers …) 12 But limits which become clear in phase 2 Limits especially amplified by • characteristics of the euro area financial markets (banks dominated financial sector; large cross-border banks) and • lack of action on the solvency front PHASE 2 WHAT WAS THE PROBLEM IN PHASE 2? 1. 2. 3. 4. Banks not fixed in phase 1 (see chart) Collateral deteriorates Some banks became structurally dependent on the ECB Sovereign problem starts gradually to emerge as a result of weak economic conditions and/or fiscal consequences of banking crisis …. Sovereign crisis erupts in 2010 and then 2011 BANKS’ SOLVENCY PROBLEMS NOT FIXED Bank capital to assets ratio (%) 12 10 8 6 4 2 0 2000 2001 2002 Source: World Bank 2003 2004 2005 GBR 2006 USA 2007 EMU 2008 2009 2010 2011 2012 AND INCREASING PRESSURES ON GOVERNMENT FINANCES Government debt/GDP Source: ECB 180 160 140 120 100 80 60 40 20 0 2007 Germany 2009 France Greece Ireland 2012 Italy Euro area 17 Domestic / Total deposits 2013Jan 2012Oct 2012Jul 2012Apr 2012Jan 2011Oct 2011Jul 2011Apr 2011Jan 2010Oct 2010Jul 2010Apr 2010Jan 2009Oct 2009Jul 2009Apr 2009Jan 2008Oct 2008Jul 2008Apr 2008Jan 2007Oct 2007Jul 2007Apr 2007Jan 2006Oct 2006Jul 2006Apr 2006Jan FACING THIS SITUATION THE FINANCIAL SYSTEM BECOMES FRAGMENTED – STRONG HOME BIAS MFI (excl ESCB) Domestic deposits / Total deposits 0.78 0.76 0.74 0.72 0.7 0.68 0.66 0.64 BANKS INCREASINGLY HAVE INCENTIVES TO BUY GOVERNMENT BONDS OF THEIR OWN SOVEREIGN Loans – retail (share of tot assets) Germany Spain France Italy 2007 30.04 58.28 23.04 37.81 2008 29.89 54.36 22.98 36.53 2009 31.16 52.51 23.26 36.24 2010 27.91 51.69 23.63 38.75 2011 27.91 47.53 23.19 37.50 2012 28.71 43.37 24.37 35.20 Jul 2013 30.53 43.69 23.46 34.85 Gov. Bonds – domestic (share of tot assets) Germany Spain France Italy 2007 1.91 2.55 2.11 4.84 2008 1.69 2.92 1.94 4.47 2009 2.15 4.41 2.09 5.29 2010 2.59 4.56 1.94 6.29 2011 2.40 5.33 1.82 6.02 2012 2.96 6.79 2.26 8.33 Jul 2013 3.12 9.09 2.10 10.12 CONSEQUENCE • Correlation between bank risk and sovereign risk • Difficult to distinguish banks’ debts from sovereign debt ECB RESPONSE TO THE SOVEREIGN CRISIS AND ITS EFFECTIVENESS • Intervention on sovereign bond market Trichet 2010 and 2011 : SMP1 (Greece) and SMP2 (Italy) Draghi: OMT • More of the same on liquidity: Draghi 2012: LTRO2 The LTRO remains main tool Initially designed to deal with liquidity became a tool to address the solvency problem of banks and sovereign Lend to undercapitalized banks against collateral …. Keep insolvent banks alive ….. Provide incentive for banks to acquire government bonds to use as collateral less loans, more domestic government bonds in balance sheet 1998W53 1999W19 1999W38 2000W05 2000W24 2000W43 2001W10 2001W29 2001W48 2002W15 2002W34 2003W01 2003W20 2003W39 2004W06 2004W25 2004W44 2005W10 2005W29 2005W48 2006W15 2006W34 2007W01 2007W20 2007W39 2008W06 2008W25 2008W44 2009W11 2009W30 2009W49 2010W15 2010W34 2011W01 2011W20 2011W39 2012W06 2012W25 2012W44 2013W11 Euro Bn More of the same 1400 1200 1000 800 600 400 200 0 Main refinancing operation Longer-term refinancing operations BANKS BECOME INCREASINGLY DEPENDENT ON THE ECB: SPAIN AND ITALY ONLY AFTER 2011q3 Spain % Portugal Ireland Greece Italy Net ECB Lending (as % of total banking system assets) Neth'lands France Jan-08 Germany Latest -5 Source: National Central Banks 0 5 10 15 20 25 BANKS, GOVERNMENT AND EURO-SYSTEM LIABILITIES: substitution but very little adjustment of size in total EA liabilities (normalized by GDP) Euro Area liabilities 100% 90% 6 80% 5 70% 4 60% 50% 3 40% 2 30% 1 20% 10% 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 0 MFIs excluding ESCB General Government 0% Eurosystem MFIs excluding ESCB General Government Eurosystem Some key fiscal issues • Close relationship between sovereign and the banking sector implies that market assessment of fiscal solvency involves consolidation of government and bank balance sheets • In such a situation the provision of liquidity by the ECB through normal operations can become close to government financing, e.g.: – by continuing to roll over liquidity provision at its regular operations in large amounts at fixed rates, the ECB can sustain banks with solvency problems (which should be the responsibility of fiscal authorities); – by accepting newly issued government debt instruments as collateral, the ECB can provide indirect financing to governments • ECB IS PARTY TO THE PROCESS OF ADDRESSING SOVEREIGN DEBT TENSIONS – INCREASING TENSIONS BETWEEN DEBTOR AND CREDITOR CONTRIES Macro Effects? 2003M01 2003M05 2003M09 2004M01 2004M05 2004M09 2005M01 2005M05 2005M09 2006M01 2006M05 2006M09 2007M01 2007M05 2007M09 2008M01 2008M05 2008M09 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 2012M05 2012M09 2013M01 2013M05 2013M09 Correlation between sovereign and bank’s risk reflected in retail rates Retail interest rates (i.r. on loans to NFC, new business, all maturities) 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 Source: Eurostat Germany Spain France Italy LOANS VOLATILITY: larger drop in the second cycle, conditionally to real economy 55 120 45 115 35 110 25 105 15 100 5 95 -5 90 -15 85 -25 80 2001Jan 2001Jul 2002Jan 2002Jul 2003Jan 2003Jul 2004Jan 2004Jul 2005Jan 2005Jul 2006Jan 2006Jul 2007Jan 2007Jul 2008Jan 2008Jul 2009Jan 2009Jul 2010Jan 2010Jul 2011Jan 2011Jul 2012Jan 2012Jul 2013Jan Euro billions Loan flows (6m MA) and industrial production Source: ECB NFC Households Industrial production (right) The 2011 recession in historical perspectives Sources: Eurostat, national banks, ECB Area Wide Model GDP YoY growth rate contibutions 4 2 0 -2 -4 France Germany Italy Spain Others Others (included Spain) Euro Area 20131 20121 20111 20101 20091 20081 20071 20061 20051 20041 20031 20021 20011 20001 19991 19981 19971 19961 19951 19941 19931 19921 19911 19901 19891 19881 19871 19861 19851 19841 19831 19821 -6 KEY LESSONS • LLR function designed to deal with liquidity – not solvency • In a financial crisis liquidity and solvency issues difficult to distinguish ex-ante • Non standard monetary policy implies assuming credit risk in central bank b/s. This is a fiscal issue • This is okay provided that liquidity policy is complemented with action on solvency – essentially fiscal • In a debt crisis banks’ debt and sovereign debt indistinguishable – need to deal with both • In absence of action on this monetary policy function also impaired and banks are key in the transmission mechanism What if … • Some have argued that the ECB should have done pure QE • But could the ECB have solved the debt problem of Italy and Greece? General question CAN THE CB BUY ALL GOVERNMENT DEBT? • Under fiat money no limitation for a LLR but the creation of base money has fiscal implications • The b/s capacity of the CB is its fiscal capacity (if liability backed by collateral the limit is the potential loss; if backed by government debt the limit is future taxes) • What matters is the consolidated b/s of governments and banks and whether this is compatible with price stability END