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European Economic and Social Committee
EUROPEAN INDUSTRY AND MONETARY POLICY
The role of the European Investment Bank (EIB)
PRESENTATION OF THE PROJECT
Bratislava
Nov 6th 2015
Main goal of the Project
.. To explore how to improve the efficiency of European
monetary policy in its impact on industry and real economy,
mainly through the collaboration between the European
Central Bank and the European Investment Bank.
Main goal of the Project
..
The main purpose of this project is to
collect,
elaborate
and
disseminate
information on the legal, technical and
economic
feasibility
of
different
mechanisms of cooperation between the
Eurosystem and the European Investment
Bank (and national promotional banks and
agencies) as a potential way of improving
the efficiency of monetary expansion in the
Eurozone.
Main goal of the Project
.. Our goal is economic/productive, not institutional
.. Any idea or proposal to increase efficiency of
monetary expansion can be of interest.
.. Even the involvement of the EIB is a tool, not the
ultimate goal by itself.
Monetary expansion
EIB know how could be useful in improving efficiency of ECB
policies, that impact economy through:
.. Key interest rates
.. Expansion of Eurosystem Balance Sheet
Monetary expansion is achieved in an indirect way, channeling
liquidity to the banking system.
Involving the EIB could ensure that key interest rates and
monetary expansion impact as directly as possible in real
economy.
Monetary expansion
Quantitative monetary expansion has evolved in an irregular but
clearly expansionary way during the financial crisis.
EUROSYSTEM CONSOLIDATED BALANCE SHEET 2008 – 2015 (million EUR)
Source: ECB/Saxo Group
Monetary Expansion is not only a matter of
financial crisis expansionary programmes
EUROSYSTEM CONSOLIDATED BALANCE SHEET 1999 – 2008
(million EUR)
Source: ECB/Depth Dynamics
Monetary Expansion is not only a matter of
financial crisis expansionary programmes
..
The main objective of the Eurosystem - Keeping inflation below
but close to the 2%- means that, in the long term, monetary
expansion will increase over the GDP increase rate.
CENTRAL BANKS BALANCE SHEET AS A % OF GDP (2000-08)
Source: ECB / FED / Hinde Capital
Monetary expansion:
Effectiveness and efficiency
..
The economic debate about monetary expansion operations
has so far focused mainly on the effectiveness of those
strategies. Various data have been provided on the results
achieved by QE regarding credit, growth, unemployment, etc.
..
While supporters of monetary expansion / QE defend the
effectiveness of these operations, using the U. S. case as an
example, critics question those results.
..
However, for the purposes of this study we are not interested
in the effectiveness of monetary expansion, but in its
efficiency, in other words the relationship between the results
obtained and the resources used.
Main goal of the Project
.. Anyway, as we will explain throughout this
presentation, our aim is not to analyse or assess
the overall effectiveness or efficiency of such
monetary expansion operations, but only to
examine the feasibility of specific adjustments
being introduced to improve the efficiency of the
transmission mechanisms of the monetary
policy, through different collaboration options
between the ECB and the EIB.
Overall risk level of the
EU Institutions
.. We don´t pretend to interfere in the debate
about the overall risk level of the EU
Institutions.
.. Our research pretends to ensure that
monetary expansion risk is more related to
real economy -and, so, more efficient- without
increasing the overall risk of the Eurosystem.
Overall risk level of the
EU Institutions
..
So, the ECB-EIB collaboration should be articulated
through mechanisms that do not increase the overall
risk of the Eurosystem consolidated balance sheet.
..
As opposed to that, increasing the efficiency of
monetary expansion implies:
a) Achieving similar results with lower resources
and risk
b) Achieving better results with similar resources
or risk
Expanded Asset Purchase
Programme 2015-2016
• On 22nd January 2015, the European Central Bank
announced a new phase of monetary expansion, basically
justified by the fall in inflation rates in the eurozone to below
the target set by the ECB itself, namely lower but close to
2% annually.
Expanded Asset Purchase
Programme 2015-2016
• In fact, both the minutes of the meeting of the Governing
Council of the ECB and the public statements of the Bank´s
representatives repeatedly mention both price stability and
the impetus provided by bank credit to growth or economic
recovery as main reasons for this quantitative expansion
programme.
Expanded Asset Purchase
Programme 2015-2016
• This programme, which began in March at a monthly rate of
EUR 60 000 million and will last “at least” until September
2016, will be implemented through the acquisition of
financial assets.
• So, “at least” it will reach 1,14 trillion EUR (As a reference:
more than 50 times the EC Investment Plan for Europe or
Juncker Plan).
Juncker Plan and Long Term Monetary Programs
Millions EUR
1.140.000
1.018.500
400.000
21.000
JUNCKER PLAN
LTRO 2011-12
TLTRO 2014-16
ECB APP PLAN
Juncker Plan and Long Term Monetary Programs
• ECB APP PLAN IS 55 TIMES BIGGER THAN JUNCKER PLAN
• The 3 long term monetary programs of the last years are 121 TIMES
bigger than Juncker Plan
• What’s happening here?
• In both cases, we are speaking about public resources channeled to
the EU economy.
• Is there no relationship between both of them?
Expanded Asset Purchase
Programme 2015-2016
Whereas the monetary expansion launched by the European Central
Bank in 2011/2012 took the form of loans to the banking sector, the
programme now approved by the ECB is based on acquisition of:
–
asset-backed securities;
–
covered bonds;
–
securities issued by governments and agencies of
the eurozone and supranational institutions.
Expanded Asset Purchase
Programme 2015-2016
..
In this Programme, monetary expansion takes place
through the purchase of assets and not through loans
to financial institutions. This does not alter the
fundamental concerns about the extent to which
monetary expansion reaches the real economy.
..
Even though it should be easier for public and private
entities to place new issues of securities while the
programme lasts and they are beneficiaries of it, the
main and fundamental effect of the programme is to
provide liquidity to the financial institutions from which
the securities are purchased.
Expanded Asset Purchase
Programme 2015-2016
..
The European Central Bank has also insisted that the aim of
new acquisitions of public debt is not to provide debt
financing for the Member States but rather to inject financial
resources into the European economy through general
expansionary monetary policies.
..
It looks very clear that the main beneficiaries of the
Programme are not the entities issuers of the assets but the
banking system as owner of the assets purchased.
Expanded Asset Purchase
Programme 2015-2016
..
Thus the problem is similar to the one described above:
namely to what extent this liquidity provided to financial
institutions is either transferred to the productive economy, or
remains stuck in financial institutions or is reinvested in
speculative activities outside the Eurozone.
..
The aim of supporting the productive economy through
monetary expansion is therefore the same under this
programme as in the framework of long-term refinancing
operations (LTRO) in 2011-2012.
Long Term Programs
LTROs
2011-2012
TLTROs
(2014-2016)
- 1 trillion €
(10% / Eurozone
GDP)
- 0,4 trillion €
(4% / Eurozone GDP)
- Loans to
European banks
- Term: 3 years
- Rate: 1%
- Loans to European
banks
- Term:
.. 4 years conditioned
to increasing credit
.. 2 years with no
conditions
ASSET PURCHASE
PROGRAM
2015-2016
-“At least”, 1,14 Trillion €
(11% / Eurozone GDP)
- Public and private
securities
The case of the targeted TLTROs
• During 2014, the ECB launched a “targeted” program:
LTROs, based on loans provided to banks with the condition
of an increase in the loan stock of the bank
• 400 million have been channeled to the banking system
through this programme.
• The “targeting” goal of this program is limited.
The case of the targeted TLTROs
• There is no “targeting” for two years financing
• Only if banks want to keep the funds after 29.09.2016, then they
must respect the “targeting” requisites.
• For half of the loans to banks (200 Million) the only requisite is to
increase the net financing, without any specific amount
• So, it´s not strange that, according to the ECB July 2015 Survey,
only 56% of this financing seems being channeled to credit.
The case of the targeted TLTROs
SOURCE: ECB. BANK LENDING SURVEY JULY 2015
The case of the targeted TLTROs
• So, according to the ECB Survey, even in this “targeted”
program:
.. 25% is being channeled to “refinancing” of the
banks
.. 16% to assets buying
.. only 59% is channeled to credit
The case of the targeted TLTROs
• Anyway, the TLTRO program may be a very good
conceptual reference:
establishing conditionalities to ensure the link with the real
economy is not incoherent with Eurozone monetary
policy
Expanded Asset Purchase
Programme 2015-2016
• We believe this is a key moment for European public- and
private-sector stakeholders –in particular European industry
represented by the EESC- in terms of defending the
interests of industry and the real economy in the face of this
programme, which will amount to at least 11% of Eurozone
GDP.
Indirect nature of monetary
expansion
• The main problem with monetary expansion is its lack of
focus. Funds are provided to banks and it´s up to the
banks to decide if these funds are or not invested and, if
so, if they are invested in or out of the Eurozone and in
productive or speculative activities.
Indirect nature of monetary
expansion
..
In monetary expansion, central banks do not finance the real
economy directly, but through the financial sector, either
through key interest rates, through loans to financial
institutions or through liquidity provided by acquiring financial
assets held by them.
..
By providing liquidity to the financial sector, it is hoped that
banks will redirect that liquidity into the real economy,
boosting credit, investment and aggregate demand.
..
But no conditions are required to the beneficiary banks so as
to make sure that the resources provided attend the real
economy.
Indirect nature of monetary
expansion
..
We believe that, in the current environment, only
channeling
these
funds
towards
productive
investments – and generally speaking the real
economy – would justify this undertaking.
Indirect nature of monetary
expansion
..
There are differing opinions about the extent to
which the banking sector will redirect the resources
obtained through monetary expansion into local
economic activity. However, it is generally accepted
that this redirection is only partial.
..
It seems that a significant proportion of the
resources generated through monetary expansion
remain stuck on bank balance sheets, are invested
outside the territory or are channelled into
speculative bubbles.
Indirect nature of monetary
expansion
..
In response to bank credit contraction and financial
instability since the outbreak of the financial crisis,
earlier monetary expansion programmes have
provided more and more liquidity at key interest rates
for European banks.
..
This is an important objective by itself, but there are
significant doubts as to how much of this stimulus has
reached industry and the real economy.
Indirect nature of monetary
expansion
..
It is important now to ensure that the direct or
indirect support to the banking sector – through
direct financing or acquisition of debt currently held
by banks – is submitted to the necessary changes
to maximise its impact for industry and productive
investment.
..
In other words, we believe it is important to ensure
that monetary expansion as far as possible is
allocated to financing Europe's productive
economy.
A more focused monetary
expansion
..
The basic purpose of this project is to examine the
extent to which this objective of financing the
productive economy can be realised through
collaboration in the implementation of monetary
expansion policies between the Eurosystem and
entities specialised in lending to the productive sector,
which at EU level means above all the European
Investment Bank (EIB).
..
This would obviously not encroach on the competence
of the European Central Bank with regard to the
objectives and the amount of monetary expansion.
A more focused monetary
expansion
This involvement of the EIB should further four basic objectives:
a) making the transmission mechanism of monetary policy more
efficient in terms of its direct connection with the real economy;
b) establishing a more direct relationship between monetary
policy, money supply and price stability;
c) establishing a more direct relationship between money supply
expansion and increasing productive capacity;
d) providing more resources for policies to promote investment in
the eurozone.
The role of the EIB
• In theory, there may be different ways to make monetary
expansion more focused in real and productive economy.
• But, from our point of view, the collaboration with the
European Investment Bank is a practical, realistic and
feasible way of achieving this goal in an efficient way.
How to involve the EIB
expertise
We can visualise different potential operational options:
..
establishing some kind of systematic advice from EIB on the
allocation of resources generated through monetary
expansion.
..
loans from the Eurosystem to the EIB
..
acquisition by the Eurosystem of securities issued by the EIB
..
setting up a fund held by the Eurosystem/ECB, but
managed by the EIB
..
setting up a fund of entity managed –and owned- by the
EIB
The role of the EIB
The European Investment Bank is probably the
key institutional locus of know-how about policy
on investment in the productive economy for the
purposes of the European Union.
.
European Investment Bank
(EIB)
.. Annual lending 2014: 80.3 bn €
.. Consolidated capital 2014: 243 bn €
.. Geographical scope: EU (90% of funding) and other
countries (10%)
European Investment Fund
.. Fund managed by the EIB
.. Ownership: EIB (majority shareholder) / European
Commission / Public and private financial
institutions.
.. Capital: 3.000 m €
.. Main objective: Venture capital for small and
medium enterprises.
EIB. Credit Rating
EUROPEAN INVESTMENT BANK
Fitch
Moody’s
Standard & Poor’s
Long term
AAA
Aaa
AAA
Short term
F1+
P-1
A-1+
EUROPEAN INVESTMENT FUND
Fitch
Moody’s
Standard & Poor’s
Long term
AAA
Aaa
AAA
Short term
F1+
A-1+
If necessary, EIB also works
through banks
BREAKDOWN OF OBLIGORS 2013
Source: Fitch / EIB. Based on the ultimate obligor
EIB also knows how to work with
banks in a very secure way:
DEGREE OF PROTECTION IN CREDIT TO BANKS 2013
Source: Fitch
The role of the EIB
..
Aside from regulatory considerations, the
European Investment Bank would seem to be an
ideal repository of the know-how required to
redirect to the real economy the resources
generated by monetary expansion.
..
Its objectives, as defined in Article 309 of the
Treaty on the Functioning of the European Union,
ensure the general interest of its activity.
The role of the EIB
..
Its activities are clearly focused on innovation,
training, industrial investment, access to funds for
small and medium-sized enterprises, and investing
in energy and infrastructure. This is exactly what
Europe needs, and more urgently than ever.
..
If we look at the usual beneficiaries of European
Investment Bank (EIB) operations during the period
2010-2014, it is clear that industry, energy and
transport are the main priorities of EIB activity:
The role of the EIB
..
We can see that investments are related
directly (industrial sectors) or indirectly (energy,
transport, telecommunications, etc.) to industrial
activity.
..
For the "industrial sectors" category, financing
provided during the reference period is further
broken down as follows:
The role of the EIB
..
The EIB's experience with redirecting financial
resources to the real economy is self-evident.
..
By the same token, EIB involvement in managing
resources generated by monetary expansion could
also be an appropriate tool for ensuring that those
resources are channelled to industry, infrastructure,
technological investment, SMEs and to the real and
productive economy in general,...
..
This way, we could ensure that the Eurozone
institutions serve the general interest, which ultimately
is the main goal of both the Eurosystem and the EIB.
Starting point
.. Main questions have to be answered:
A.
B.
C.
D.
..
CAN IT BE DONE?
HOW?
IN WHICH AMOUNT?
WHEN?
Our position / goals are being adapted as the Project goes
on, according to the positions of the European stakeholders,
EU institutions, technical issues, …
Main steps
..
..
..
..
..
Preliminary Draft (February 2015)
Decision of the EESC Board (march 2015)
Presentations on “Some Basic Concepts “ and “Main Issues”
(march 2015)
First contacts with EIB and ECB (march 2015)
Checking with experts in different EU countries (april 2015):
- 70 experts checked
- At the moment, 47 answers
Main steps
..
Four main power point presentations (to be continuously
updated) (may 2015):
- PRESENTATION OF THE PROJECT
- POLICY ISSUES
- LEGAL AND TECHNICAL ISSUES
- MAIN PROVISIONAL CONCLUSIONS
Main steps
.. Next steps:
-
Small presentations with stakeholders in
Brussels.
-
Brussels Round Table: November 12th
-
3 local events (Vilnius, Bilbao, …)
Main premises
A. One of the major barriers to increasing the efficiency
of monetary expansion policies is the indirect nature
of their transfer to the real economy, which is
achieved by injecting liquidity into the banking
system, either through loans to financial institutions or
acquisition of assets owned by those institutions.
But banks are not subjected to conditions that ensure
the correct destination of the funds. It is hoped that
financial institutions will move this liquidity into the
real economy, but this happens only partially.
Main premises
B. The EIB is the EU institution that has the
know-how and the tools that are specifically
designed to channel credit to the real
economy (infrastructure, SMEs, etc.)
Main premises
C. The main hypothesis of this Project is that
structural
collaboration
between
the
Eurosystem and the European Investment
Bank – or national promotional banks or
agencies- would be an excellent tool for
significantly improving the efficiency of
monetary expansion operations in the
Eurosystem, maximising efficiency at their
final destination, the real economy.
Main premises
D. As said before, this collaboration could be
achieved through:
.. Involvement of the EIB or / and of national
promotional banks or agencies from member states.
.. Involvement of the EIB could be in a substantial part
of the monetary expansion or in a limited amount.
Main premises. Some options
.. Transferring resources to the EIB balance:
a) Directly: ECB loans to the EIB
b) Indirectly: Purchase by the ECB of debt issued by the EIB
..
Without transferring resources to the EIB balance:
Setting up a Fund managed by the EIB but under the
Eurosystem / ECB ownership
Setting up a Fund –or an entity- managed and
owned by the EIB
Making use of the EIB expertise through
advice, formal reports or delegation in allocation of
resources.
Main premises
F.
This involvement of the EIB should be
compatible with the objectives of monetary
expansion, namely:
.. to increase / decrease money supply;
.. to support price
economic recovery.
stability
and
Main premises
G. This involvement of the EIB should be a way to:
a) Achieving
similar results with lower
resources or risk
b) Achieving better
resources or risk
results
with
similar
European Economic and Social Committee
EUROPEAN INDUSTRY AND MONETARY POLICY
The role of the European Investment Bank (EIB)
POLICY ISSUES
Bratislava
Nov 06 2015
POLICY ISSUES. Why it matters: To clarify
that …
A. OUR PROJECT IS NOT RELATED TO SOME USUAL
POLITICAL DEBATES ON MONETARY POLICY
B. INVOLVING EIB IS COMPATIBLE
OBJECTIVES OF MONETARY POLICY
WITH
THE
C. INVOLVING EIB IN MONETARY POLICY IS A VERY
CLEAR
WAY
FOR
IMPROVING
MONETARY
EFFICIENCY AND NON-INFLATIONARY IMPACT OF
MONETARY EXPANSION
INDEX
..
MONETARY EXPANSION. SOME POLITICAL ISSUES
A.
B.
C.
D.
..
..
..
..
..
..
MONETARY EXPANSION VS. RESTRICTIVE POLICIES
DIFFERENT VIEWS AND INTERESTS BETWEEN MEMBER STATES
MONETARY RISK VS. FISCAL RISK
PUBLIC RISK VS. PRIVATE RISK
MONETARY POLICY AND INVESTMENT POLICY
LIMITS OF MONETARY POLICY
PRICE STABILITY POLICY
POLICY QUALIFICATION
MONETARY POLICY AND GROWTH POLICY
FINAL REMARK
SOME
POLITICAL ISSUES
Monetary Expansion. Some
political issues.
..
There are some issues related to different political perceptions of
monetary expansion.
..
Our project shouldn´t and needs not to get involved in these issues:
A.
B.
C.
OVERALL RISK OF THE EU INSTITUTIONS
MONETARY EXPANSION VS. RESTRICTIVE POLICIES
DIFFERENT VIEWS AND INTERESTS BETWEEN MEMBER
STATES
D. MONETARY RISK VS. FISCAL RISK
E. PUBLIC RISK VS. PRIVATE RISK
Overall risk and efficiency of
the EU Institutions
.. Our project should not get involved in the political
debate about to which point the overall risk of the
EU Institutions should increase or decrease.
.. The collaboration we propose between ECB /
Eurosystem and EIB (+national promotional banks
or agencies) pretends to make monetary policy
more efficient ensuring a more direct link to real
economy.
Overall risk and efficiency
of the EU Institutions
.. Higher efficiency in monetary expansion may suppose:
a) a lower risk with similar results on real economy
or
b) better results on real economy with similar risk.
..
So, there is not any reason to think that the results of this
collaboration could –by themselves- increase the overall
risk of the EU Institutions unless a political decision in this
sense is agreed. Just the opposite should happen.
Overall risk and efficiency
of the EU Institutions
..
This approach will be taken account of, concerning:
-
Monetary Risk allocation between national banks
and ECB
Relationship between monetary risk and fiscal risk
Different risk policies in ECB and EIB operations
Monetary Expansion vs.
Restrictive Policies
.. There are different political views about to which
point monetary policy should be more
expansionary or more restrictive. Different views in
different countries also.
.. That´s not our point. The aim of this EESC Project is
related to how monetary expansion is managed,
not to the amount of this expansion.
Monetary Risk vs. Fiscal Risk
.. Risk-sharing scheme in the 2015-16 Programme
..
Monetary expansion is usually related to higher monetary risk. But, in an
80% of the new Programme, risks are taken not by the ECB but by the
national central banks. In this case, it´s more a matter of fiscal risk than of
monetary one.
..
Fiscal risk falls on the member states more than on the whole Eurozone.
..
The 20% of shared risk includes possible losses on purchases of bonds of
supranational institutions by the National Central Banks (12%), and
possible losses on additional asset purchases of the ECB (8%).
Monetary Risk vs. Fiscal Risk
..
This EESC project must not become involved in this
dialectic. The same criteria defined for each monetary
expansion programme could be applied to the
collaboration between EIB and ECB.
..
For this purpose, public promotional banks or agencies in
member states can get involved. If necessary in the same
proportion on risks (80%) as national central banks are
now involved.
Involving national promotional
banks or agencies
..
Involving national promotional banks or agencies
could include criteria for allocating resources
between
those
institutions,
as
well as
implementation and monitoring of the management
of the operations.
..
The EIB could be in charge of the definition and
monitoring of the implementation by promotional
banks or agencies of these criteria and
requirements
Public Risk vs. Private Risk
..
ECB: The aim of acquisitions of public debt is not
financing governments but injecting resources into the
economy through the financial system.
..
So, it´s not clear if resources managed by the EIB
should be subject to requirements regarding
whether they ultimately reach public or private
entities.
..
If necessary, an specific proportion between private
and public sector financing could be agreed.
MONETARY POLICY
AND INVESTMENT
POLICY
Monetary expansion
and investment policy
..
The main activity of monetary expansion (ECB) and EU investment
(EIB) may be similar: “INJECTING MONEY IN THE ECONOMY”
..
However, the main policies to which these activities respond look
different:
Monetary policy (ECB)
Investment policy (EIB)
..
But, as we´ll see:
both policies cannot be separated.
Monetary Policy is neither an objective of the main receptor
of Monetary Expansion (the Banking System)
An Opportunity for
Investment Policy
.. Involving EIB in monetary expansion would be quite an
opportunity for EU investment policy.
.. Just remember that the Asset Purchase Programme of
the Eurosystem (1,14 trillion €) is 50 times bigger than
the Juncker Plan (21.000 million €)
.. If needed by the dimension of the resources or for
other reasons, the EIB would collaborate with public
promotional banks or agencies of member states
Investment Policy and
Demand of Credit
.. From the point of view of the demand of credit,
there should be no much concern.
.. Because of the differential between key interest
rates of the ECB and retail interest rates, there is a
huge capacity for providing credit to industry –
and, very specially, to SMEs, cooperatives, …- at
lower interest rates. That would ensure demand.
LIMITS OF
MONETARY POLICY
The EU Treaty
Objectives of Monetary Policy
The EU Treaty
..
The tasks of the European System of Central Banks
(ESCB) include the "definition
and implementation of monetary policy" (Art. 127.2 EU Treaty) within the primary
objective of maintaining "price stability“ (Art. 127.1 EU Treaty).
Art. 127.1:
“1. The primary objective of the European System of Central Banks (hereinafter referred
to as “the ESCB”) shall be to maintain price stability. Without prejudice to the objective of
price stability, the ESCB shall support the general economic policies in the Union with a
view to contributing to the achievement of the objectives of the Union as laid down in
Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the
principle of an open market economy with free competition, favouring an efficient
allocation of resources, and in compliance with the principles set out in Article 119”.
Objectives of the Eurosystem
So, main criteria:
1. PRIMARY OBJECTIVE: PRICE STABILITY
2. General economic policies of the Union (art. 3)
3. Principle of an open market economy with free competition
4. Efficient allocation of resources
5. Principles Art. 119 (Coordination of Member States’ economic policies, internal
market, sound public finances, sustainable balance of payments).
Limits of Monetary Policy
The EU Treaty
EU Court of Justice
Advocate General
OPINION Jan 14 2015
130. ”… if a measure belongs to the category of instruments which the law
provides for carrying out monetary policy, there is an initial presumption
that such a measure is the result of … monetary policy … a presumption
that could be rebutted if … the measure were to pursue objectives other
than those specifically listed in Articles 127(1) TFEU and 282(2) TFEU”.
132. ”… in order for a measure of the ECB actually to form part of monetary
policy, it must specifically serve the primary objective of maintaining price
stability and it must also take the form of one of the monetary policy
instruments expressly provided for in the Treaties and not be contrary to
the requirement for fiscal discipline and the principle that there is no
shared financial liability”.
(OPINION of Advocate General EU Court of Justice Jan 14 2015)
Limits of Monetary Policy
The EU Treaty
So, for our purpose, these requisites must be fulfilled:
1. Price stability as objective (Art. 3 objectives only in a
secondary plane).
2. Take the form of one of the monetary policy instruments
(buying and selling financial instruments, credit operations)
Limits of Monetary Policy.
Price Stability
..
The point is not if Price Stability is an objective for the EIB.
It is not. But it is neither so for the main receptor of ECB
funds: the Banking System.
..
The main point is if channeling funds through the EIB can
be a tool for Price Stability in a similar way as doing so
through the Banking System, as usual.
PRICE STABILITY
POLICY
What´s Price Stability Policy?
.. EU Justice Court: “Fight against inflation”
.. ECB: “Fight against inflation” or “fight against deflation”,
with the aim of keeping inflation “below but close to 2%”.
.. Usually, it is done by Central Banks through impulses
aimed at ▲/▼ money supply
What´s Price Stability Policy?
.. Monetary policy impulses work through interest rates and
through the increase / decrease of the monetary base,
hoping that banks make use of this monetary base to
increase the “broad money” (M3) through credit.
Monetary Policy
FROM EUROSYSTEM TO MONEY SUPPLY
E
U
R
O
S
Y
S
T
E
M
MONETARY
EXPANSION
▲ MONETARY BASE
▼ INTEREST RATES
BANKING
SECTOR
▲ MONEY
SUPPLY / M3
Money Supply and Credit are
directly related
Monetary Expansion is less and
less related to Money Supply
Monetary Expansion is also less and less
related to credit to private sector
There is no Price Stability Policy
without Credit to Real Economy
.. Monetary policy is not “a matter of the banking
sector”, of providing liquidity to it. The financial
sector is only an instrument.
.. The effects on money supply are only achieved
when –and if- the banks reinvest the funds in the
real economy.
There is no Price Stability Policy
without Credit to Real Economy
EU Court of Justice
Advocate General
OPINION Jan 14 2015
“Monetary policy transmission channels do not
function as mechanisms producing immediate
effect but as a framework through which the ECB
sends out a series of ‘impulses’ or signals with a
view to them reaching the real economy.”.
(OPINION of Advocate General EU Court of Justice Jan 14 2015)
There is no Price Stability Policy
without Credit to Real Economy
..
There are differing opinions about the extent to which
the banking sector redirects the ECB funds into
economic activity.
..
However, it is generally accepted that this redirection
is only partial. A significant proportion of the
resources remain stuck on banks balance sheets, are
invested outside the eurozone or are channeled into
speculative bubbles. In these cases, the objectives of
money supply, stability of prices and monetary policy
are not achieved.
There is no Price Stability Policy
without Credit to Real Economy
..
So, as the EESC Project proposes, making sure that
monetary expansion gets to real economy is not only
good for investment policy but also for monetary policy.
..
When funds channeled through the banking system
don´t arrive to the real economy, they become mere
subsidies to the banks without purpose. Or, if we try to
qualify it, they would be a result of “Banking Sector
Stability Policy”, but this policy should not be an
objective of Monetary Policy according to the EU Treaty.
Monetary Policy
FROM EUROSYSTEM TO REAL ECONOMY
E
U
R
O
S
Y
S
T
E
M
FINANCIAL SECTOR
OUT OF THE EUROZONE
INVESTMENTS
BANKING
SECTOR
REAL
ECONOMY
Monetary Policy
FROM EUROSYSTEM TO REAL ECONOMY
FINANCIAL SECTOR
E
U
R
O
S
Y
S
T
E
M
BANKING
SECTOR
EIB
OUT OF THE EUROZONE
INVESTMENTS
REAL ECONOMY
Money Supply does not evolve through expansionary impulses. Only through bank credit.
..
Price Stability (Fight against deflation at the moment) is
achieved through the increase / decrease of Money
Supply
..
The increase in Money Supply is achieved not through
ECB expansionary impulses (low interest rates / QE) but
only when these impulses are transmitted to the real
economy through bank credit.
Bank credit is the link between
Monetary Policy and Price Stability
E
U
R
O +/- Interest rates
/ Liquidity
S
Y
S
T
E
M
+/- LOANS
BANKING
SECTOR
+/- MONEY
SUPPLY
PRICE
STABILITY
The link between Monetary Policy and Price Stability
AND WHAT ABOUT EIB?
E
U
R
O +/- Interest rates
/ Liquidity
S
Y
S
T
E
M
+/- LOANS
EIB
+/- MONEY
SUPPLY
PRICE
STABILITY
EIB role and Price Stability
Policy
..
From a qualitative point of view, the link between
Monetary Policy and Price Stability works IN THE SAME
WAY through the Banking Sector or through the EIB.
..
As we´ll see, the impact on Price Stability through the
EIB would be, anyway, far more efficient.
EIB role and Price Stability
FINANCIAL SECTOR
E
U
R
O
S
Y
S
T
E
M
BANKING
SECTOR
EIB
OUT OF THE EUROZONE
INVESTMENTS
REAL ECONOMY
PRICE
STABILITY
EIB role and Price Stability
The main difference is:
..
Through the EIB, resources are ALWAYS channeled to real
and productive economy
..
Through the Banking Sector, sometimes it´s so and
sometimes not.
.
POLICY
QUALIFICATION
Policy Qualification
TWO MAIN REQUISITES OF MONETARY POLICY
A. INSTRUMENT: Credit / Asset acquisition
B. GOAL: Price Stability
Policy Qualification. POINT OF VIEW OF THE INSTRUMENTS
EU POLICY
E
U
R
O
S
Y
S
T
E
M
BANKING
SECTOR
MONETARY POLICY
FINANCIAL
SECTOR
MONETARY POLICY
OUT OF THE
EUROZONE
INVESTMENTS
MONETARY POLICY
EIB
MONETARY POLICY
Policy Qualification. POINT OF VIEW OF PRICE STABILITY
EU POLICY
E
U
R
O
S
Y
S
T
E
M
BANKING
SECTOR
FINANCIAL SECTOR
STABILITY POLICY
FINANCIAL
SECTOR
FINANCIAL SECTOR
STABILITY POLICY
OUT OF THE
EUROZONE
INVESTMENTS
MONETARY POLICY
EIB
MONETARY POLICY
POLICY QUALIFICATION
From the point of view of the instruments:
..
The EIB channel is Monetary Policy in the same way as the Banking
Sector channel
From the point of view of the goals (Price Stability):
..
As part of a program of monetary expansion, its purpose is linked to
price stability in the same way as credits to the financial system or
buying assets owned by it.
..
Furthermore: Involving the EIB would make monetary policy far more
efficient, as it would ensure the link between the impulse of monetary
expansion (Monetary Base) and real economy (M3).
MONETARY POLICY
AND GROWTH POLICY
Monetary Policy is not only related to Money
Supply but also to Money Demand.
..
Price Stability, of course, is a result not only of the evolution of
Money Supply but also of the evolution of Money Demand.
..
So, it would be also part of Monetary Policy any policy:
a) Making use of monetary policy tools (monetary expansion
…).
b) Having the purpose of increasing / decreasing money
demand.
Bank credit is also the link between
Monetary Policy and Money Demand
E
U
R
O
S
Y
S
T
E
M
+/- LOANS
+/- Interest rates /
Liquidity
BANKING
SECTOR
+/GROWTH
PRICE
STABILITY
+/- MONEY
DEMAND
Bank credit is also the link between
Monetary Policy and Money Demand
E
U
R
O
S
Y
S
T
E
M
BANKING
SECTOR
+/- LOANS
TO REAL
ECONOMY
+/GROWTH
+/- MONEY
SUPPLY
PRICE STABILITY
+/- MONEY
DEMAND
Monetary Policy is not only related to Money
Supply but also to Money Demand.
..
In the middle / long term, growth is the most
important factor in the evolution of money
demand.
..
So taking account of the impact of policies in
growth is not only an option for monetary policy.
It´s a need.
Monetary Policy and Growth
Policy
..
It has been said that monetary policy should be linked only to
price stability and, so, it cannot be linked to growth policy.
..
But:
-
The EU Treaty indicates that price stability is the first but
not the only goal of monetary policy,
-
Price stability itself is not only related to money supply but
also to money demand and, so, it is also related to growth.
Monetary Policy and Growth
Policy
..
So:
-
If credit reaches real economy (consumption, expenditure
…) but no productive activities, the result will be money
supply expansion but no money demand expansion and so,
we´ll achieve an inflationary impact
-
By contrast, if credit reaches not only the real economy but
also productive activities –as EIB operations do- the result
will be expansionary both in money supply and in money
demand. So, the inflationary impact will be neutralized.
Monetary Policy and Growth Policy
E
U
R
O
S
Y
S
T
E
M
NONPRODUCTIVE
ACTIVITIES
MONEY
SUPPLY
NO GROWTH
(
MONETARY
EXPANSION
INFLATIONARY
IMPACT
MONEY
DEMAND)
MONEY
SUPPLY
PRODUCTIVE
ACTIVITIES
GROWTH
(
MONEY
DEMAND)
NO
INFLATIONARY
IMPACT
Monetary Policy and Growth
Policy
..
So, if monetary expansion achieves its objective of increasing
money supply (M3) in, let us say, a 10% but not achieving
growth in the economy, then the result will be clearly
inflationary.
..
In the opposite way, if this increase of a 10% in money supply
is matched by a 10% growth in the economy, then there will
be no inflationary impact in the economy.
..
So, the impact of monetary expansion in growth should be
one of its main purposes.
POLICY ISSUES.
FINAL REMARK
Policy Issues. Final remark
..
Improving the link between monetary expansion and
productive economy through the structural collaboration
between the Eurosystem and the European Investment Bank
seems coherent with the main objectives of both the ECB and
the EIB and with different EU policies:
-
Investment Policy
Growth Policy
Monetary Policy
Policy Issues. Final remark
.. Furthermore, it seems that the structural
collaboration between the Eurosystem and the EIB
would be a significant instrument to improve the
efficiency of monetary policy, clarifying the link
between monetary policy and broad money supply,
real economy and price stability.
Efficiency of Monetary Policy
E
U
R
O
S
Y
S
T
E
M
BANKING
SECTOR
FINANCIAL SECTOR
Monetary
inefficiency
OUT OF THE EUROZONE
INVESTMENTS
Monetary
inefficiency
REAL BUT NONPRODUCTIVE ECONOMY
Monetary efficiency
but inflationary
impact
PRODUCTIVE
ECONOMY
EIB
PRODUCTIVE
ECONOMY
Monetary
efficiency
+
Non-inflationary impact
Policy Issues. Final remark
..
All these objectives can be achieved through different
procedures. The specific collaboration tools between the
Eurosystem and the EIB should maximize the efficiency of the
assignment of resources, either
a)
achieving better results (more investment in
productive activities) with the same resources or
b)
achieving a similar impact in the real economy with a
lower investment of resources.
European Economic and Social Committee
EUROPEAN INDUSTRY AND MONETARY POLICY
The role of the European Investment Bank
TECHNICAL AND LEGAL ISSUES
Bratislava
Nov 06 2015
Starting point
..
Technical and legal issues of a
"Cooperation Agreement" between the ECB
and the EIB through which the EIB would
get involved in the investment decisions on
monetary expansion
Starting point
As said before, this collaboration could be achieved
in different ways:
.. Involvement of the EIB or / and of national
promotional banks or agencies from member states.
.. Involvement of the EIB could be in a substantial part
of the monetary expansion or in a limited amount.
Starting point. Some options
.. Transferring resources to the EIB balance:
a) Directly: ECB loans to the EIB
b) Indirectly: Purchase by the ECB of debt issued by the EIB
..
Without transferring resources to the EIB balance:
Setting up a Fund managed by the EIB but under the
Eurosystem / ECB ownership
Setting up a fund –or an entity- managed and owned
by the EIB
Making use of the EIB expertise through
advice, formal reports or delegation in allocation of
resources.
LEGAL ISSUES
Legal issues
.. Legal capacity of the EIB
..
“Independence of the ECB”: Autonomy of the ECB to define
monetary policy.
..
Geographical scope: Eurozone (ECB) / European Union (EIB)
..
Ability to delegate to the EIB the approval of operations
..
Formalization of the collaboration ECB-EIB
Legal capacity of the EIB
RESOURCES
The EIB can make use of its own resources as well as of capital markets.
ACCOUNT OPENING
As a public entity, the EIB is able to open accounts with the ECB and with
national central banks. (Article 17 of the Statute of the ESCB and of the ECB)
CREDIT OPERATIONS
As a credit institution, the EIB is able to conduct credit operations with other
credit institutions and market participants, with lending being based on
adequate collateral. (Article 18.1 of the Statute of the ESCB and of the ECB)
Legal capacity of the EIB
OPEN MARKET OPERATIONS
Securities issued by the EIB can be acquired by the ECB like those of
any other entity. (Article 18.1 of the Statute of the ESCB and of the
ECB)
OPERATIONS WITH PUBLIC ENTITIES
As a publicly owned credit institution, the EIB is not subject to the
restrictions that apply to other entities with regard to credit operations
or direct purchase of debt by the ECB. (Article 123 (2) of the EU
Treaty and Article 21.3 of the Statute of the ESCB and of the ECB)
Legal capacity of the EIB
IF SOME CHANGES ARE NEEDED:
It is possible that appropriate participation of the EIB in the
implementation of ECB monetary policy could require certain
changes, major or minor, in the operation of the Eurosystem. It is
important to note that, apart from the criteria defined in the Treaty, the
monetary policy of the Eurosystem can be adapted or amended by
the ECB itself.
NOTE:
Section 1.6 of the Guideline of the ECB on monetary policy instruments and procedures
of the Eurosystem (2011/817/EU):
"MODIFICATIONS TO THE MONETARY POLICY FRAMEWORK
The Governing Council of the ECB may, at any time, change the instruments,
conditions, criteria and procedures for the execution of Eurosystem monetary policy
operations“.
Legal capacity of the EIB
..
According to the Article 17 of the Statute of the EIB,
interest rates in the operations of the EIB must be
“linked” to the capital market rates.
..
So, it can be a reason for the collaboration to be
implemented not through the EIB itself but through
an specific found or entity managed by the EIB. In
other case, nearly the whole rates differential
would remain in the EIB itself.
Legal capacity of the EIB
“STATUTE OF THE EIB
Article 17
1. Interest rates on loans to be granted by the Bank and commission and
other charges shall be adjusted to conditions prevailing on the capital
market and shall be calculated in such a way that the income there from
shall enable the Bank to meet its obligations, to cover its expenses and
risks and to build up a reserve fund as provided for in Article 22.
2. The Bank shall not grant any reduction in interest rates. Where a
reduction in the interest rate appears desirable in view of the nature of
the investment to be financed, the Member State concerned or some
other agency may grant aid towards the payment of interest to the extent
that this is compatible with Article 107 of the Treaty on the Functioning of
the European Union."
Legal capacity of the EIB
.. Monetary policy operations feed into the
economy at clearly preferential (“key”) rates.
We need to consider whether or not the
requirement to use market interest rates is
likely to hinder the redirection of resources
generated by monetary expansion operations.
.. Of course, this would not affect resources that
are not included in the EIB's balance sheet.
Independence of the ECB
EU TREATY:
Art. 130: ‘When exercising the powers and carrying out the tasks and duties
conferred upon them by the Treaties and the Statute of the ESCB and of the
ECB, neither the European Central Bank, nor a national central bank, nor
any member of their decision-making bodies shall seek or take instructions
from Union institutions, bodies, offices or agencies, from any government of
a Member State or from any other body. The Union institutions, bodies,
offices or agencies and the governments of the Member States undertake to
respect this principle and not to seek to influence the members of the
decision-making bodies of the European Central Bank or of the national
central banks in the performance of their tasks”
Independence of the ECB
• The purpose of the Independence Principle is to protect
the ECB from governments trying to finance themselves
in an easy way through monetary expansion.
• The purpose of the Independence Principle cannot be
protecting the ECB “from real economy”
Independence of the ECB
• So, we think that:
.. An inappropriate use of the independence principle
should not be accepted
.. The Governing Council of the ECB should not make
use of this principle in an inadequate way
Independence of the ECB
• Our proposal: An adequate interpretation of the “Independence
Principle”, should be limited to the use of monetary expansion to
governments budget financing
• Anyway, “just in case”, for the purpose of this project, we have
accepted, as a basis for the analysis, the restrictive interpretation
of the Independence Principle.
• So, we understand that any decision concerning the management
of monetary expansion or the collaboration with the EIB should be
approved by the ECB
Independence of the ECB
What’s Independence?
Ref.: “Central bank independence under European Union and other international
standards” Robert Sparve. ECB 2005:
- Institutional Independence
- Personal Independence
- Financial Independence
- Functional Independence (on the relationship between NCBs
and the Eurosystem)
Only “Institutional Independence” might be of concern in our case.
Independence of the ECB
INSTITUTIONAL INDEPENDENCE. Some criteria:
-
The right of third parties to approve, suspend, annul or defer
decisions by the NCBs
-
The right to censor decisions on legal grounds and subsequently
submit them to political authorities for final decision
-
The right to be consulted (ex ante) on an NCB’s decisions
-
“The right of representatives of external political authorities to
participate in the decision-making bodies of an NCB with a right to
vote is, even if not decisive, incompatible with the Treaty and the
Statute; no voting rights for such representatives at board meetings
may be acceptable”.
Independence of the ECB
MAIN CONCLUSION
-
There might be some doubts if the collaboration between EIB and ECB is channeled
through some kind of “delegation” in the EIB to take decisions on funds created
through monetary expansion
-
But:
- “Delegate” is not the same as give “a right to participate in the decision
making- bodies”
- EIB is not a “political authority”
- Delegating some decisions on an specific fund is not the same as “to
participate in the decision-making bodies”.
Anyway: JUST IN CASE, the limits of the delegation capacity of the ECB in the EIB
concerning investment decisions should be specifically analysed.
Ability to delegate in the EIB the approval of
operations
• There may be some doubts about the ability of the ECB to delegate
the approval of operations
• But there are different ways to solve this issue:
.. Ratification “a posteriori” of the operations approved by
the EIB
.. Operations approved by EIB don´t concern ECB funds but
funds provided by the ECB to an specific entity (perhaps a
subsidiary of the EIB)
Ability to delegate in the EIB the approval of
operations. OPTION A
ECB
Fund without
legal
personality
(ECB Assets)
Funding
EIB
Ability to delegate in the EIB the approval of
operations. OPTION B
ECB
Loans at
key interest
rates
EIB
New entity
or
subsidiary
Ability to delegate in the EIB the approval of
operations. OPTION C
ECB
Loans at
key interest
rates
EIB
If EIB capital is not enough:
.. an specific reserve fund
could be created
.. in some cases, financed by
the differential in interest rates
Geographical scope
..
The eurozone is the geographical scope of the ECB.
Obviously, EIB involvement in implementing monetary
policy should not modify this.
..
Once
the
mechanisms
of
cooperation
are
sufficiently established, the EIB could decide to
set up a section or subsidiary specifically for this
purpose, whose activity would be limited to the
eurozone. (Article 28 of the Statute of the EIB)
..
Monitoring of this section or subsidiary could
be
assigned to an specific committee consisting of
representatives of the eurozone members.
TECHNICAL ISSUES
SOME TECHNICAL ISSUES
..
Constrained credit demand
..
Technical capacity of the EIB
..
Key differences in investment policies
between ECB and EIB
..
Risk concentration
Constrained credit demand. To
which point?
CHANGES IN DEMAND
FOR LOANS OR CREDIT
LINES TO ENTERPRISES
(net percentages of banks
reporting positive demand)
SOURCE: ECB. BANK LENDING SURVEY OCTOBER
2015
Constrained credit demand. To
which point?
PURPOSES FOR WHICH EURO AREA BANKS USE THE ADDITIONAL
LIQUIDITY FROM THE EXPANDED APP (average percentage of
respondents per category) SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015
Constrained credit demand. To
which point?
PURPOSES FOR WHICH EURO AREA BANKS USE THE ADDITIONAL
LIQUIDITY FROM THE EXPANDED APP. GRANTING LOANS
(percentage of respondents) SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015
Constrained credit demand. To
which point?
USE OF FUNDS FROM THE PAST AND FUTURE TLTROs
(percentage of respondents) SOURCE: ECB. BANK LENDING SURVEY JULY 2015
Constrained credit demand. To
which point?
..
According to the ECB data, it looks like credit
demand is increasing and is expected to increase
..
In a significant part, banks are using the additional
liquidity from the APP Programme to granting
loans to enterprises. So, enterprises do need it.
..
Anyway, even in a context of constrained credit, it
would not be a reason against the collaboration
between EIB and ECB. It is not a temporary shortterm issue.
Technical capacity of the EIB (I)
..
Very specially, in the context of EIB commitments related
to the Juncker Plan. To which point can EIB expand its
capacities for the management of new funds?
..
The issue is not EIB capacity but the joint capacity of EIB
+ National promotional banks and agencies.
..
We are not in a short-term issue. Capacities can be
expanded in a progressive way.
..
Anyway, investment capacities of an expanded EIB would
be, in any case, stronger than ECB capacities to allocate
resources to real economy.
Technical capacity of the EIB (II)
..
If necessary, EIB can also work as an advisor for a
better link of ECB operations to real economy
..
If necessary, EIB can work in a similar way as ECB:
Just providing liquidity to banks, but establishing
the necessary conditions to ensure their
destination to real economy.
Key differences in investment
policies
..
Depending on the position taken by the EIB in the
collaboration with the ECB, we should compare its
investment policies with the ECB policies or with
the policies of the private banks that receive funds
from the ECB.
..
Of course, taking into account that policies
developed in the framework of the ECB-EIB
collaboration should not necessarily be the same
as the usual ones in these institutions.
Key differences in investment
policies
If we compare ECB and EIB policies …
ECB
EIB
LIQUIDITY
High
Low
TERM
Short - Medium
Medium - Long
INTEREST
RATES
Far lower than
retail market
Close to retail market
CREDIT RISK
Usually lower
(Banks,
Securities)
Usually higher
(SMEs, Banks, Public
banks)
RISK
ABSORPTION
.. ECB
.. Monetary risk
.. Fiscal risk
.. EIB (or EIFund)
.. Fiscal risk
Key differences in investment
policies
But if we compare EIB and private banks policies …
PRIVATE BANKS
EIB
LIQUIDITY
Low
Low
TERM
Medium - Long
Medium - Long
INTEREST
RATES
Retail market
Close to retail market
CREDIT RISK
Usually higher
(Businesses, Households,
Securities, …)
Usually lower
(SMEs, Banks, Public
banks)
.. Own balance sheet
.. EIB (or EIFund)
.. Fiscal risk
RISK
ABSORPTION
Risk absorption
..
If risk falls on the EIB, its capital would be a
very strict limit for the collaboration.
..
But, as we know, the point is not EIB but EIB
+ National Promotional Banks and Agencies.
..
But, as we have seen, in an “expanded
EIB”, differentials in interest rates could
allow to compensate this risk through an
specific reserve fund.
Risk absorption
..
If risk falls on the ECB / Eurosystem,
delegation in the EIB would have to be
agreed. But, as we have seen, there are
different ways for this.
Risk policy
.. “Central banks cannot bankrupt”. Why?
.. If necessary, ECB can pay its debts just issuing new
currency.
.. ECB debts are not debts against the ECB itself but
rather against the European economy.
.. So, risks accepted by central banks use to be
“monetary” risks, affecting the value of the currency.
Risk policy
.. However, the European monetary sistem is a
“mixed” one.
.. Risks taken by national central banks are not
“monetary” risks but “fiscal” risks. Their deficits
cannot be covered by currency emission. If
resources
are
needed,
their
respective
government should provide them.
Eurosystem. Loss absorption capacity in
European central banks.
(billions €) 2013
CREDIT RISK
Credit risk in ECB expansionary policies is
usually lower than risk in EIB loans.
(Usually, through collateralized loans to banks)
The point is WHY?
CREDIT RISK
.. Two main reasons:
a) The image / reputation factor
It is understood that the reputation of the ECB solvency is key
for the reputation of the Euro itself.
b) The “risk-sharing” factor
.. Monetary risk falls on the entire Eurozone.
.. Fiscal risk may fall on the entire Eurozone or on member
states.
CREDIT RISK
.. The differential in credit risk can be compensated:
-
Through the differential in interest rates.
-
Through lower risks in ECB operations not
linked to the EIB
Guarantee
..
On the other hand, if EIB activity is limited
to "managing" funding owned by the ECB
or the Eurosystem, the risk is borne by the
Eurosystem itself, even if the decisions are
taken by the EIB.
..
In this case, the EIB could follow the
necessary criteria for defining asset quality.
EIB-EIF. Credit Rating
Fitch
Moody’s
Standard
& Poor’s
Long term
AAA
Aaa
AAA
Short term
F1+
P-1
A-1+
If necessary, EIB also knows how to
work through banks
BREAKDOWN OF OBLIGORS 2013
Source: Fitch / EIB. Based on the ultimate obligor
EIB also knows how to work with
banks in a very secure way:
DEGREE OF PROTECTION IN CREDIT TO BANKS 2013
Source: Fitch
Liquidity risk
..
Many Eurosystem operations “were” short-term.
The 2011-2012 LTRO was
based on three
year maturities. Under the new APP programme
the maximum maturity is 30 years.
..
EIB operations are usually for a longer term than
the operations of the Eurosystem “were” before
the crisis.
Looking at the portfolio of funding maturity on
31.12.2013, it is clear that a large proportion
of EIB loans mature in over five years.
Liquidity risk
APP Programme.
Bonds average maturity: 8 years
Source: ECB / BBVA Research
ECB Long term operations,
more and more important
Source:
Nomura / ECB
ECB Long term operations,
more and more important
EUROSYSTEM ASSETS 10.30.2015. Millions €
OTHER ASSETS
GOVERNMENT DEBT
SECURITIES (INCLUDING APP)
OTHER CLAIMS ON CREDIT …
LTRO
MRO
CLAIMS ON NON-EURO AREA…
CLAIMS IN FOREIGN CURRENCY
GOLD AND GOLD RECEIVABLES
0
400000
800000
Source: ECB. Consolidated financial statement of the Eurosystem as at Oct 30th 2015
1200000
Liquidity risk
..
Management of monetary policy may require an easier
asset liquidity for the purposes of restrictive strategies.
..
This would mean:
a) Investing in shorter terms or …
b) Investing in easy to liquidate assets (securities)
..
Liquidity standards may be difficult to fit by direct loans to
SMEs.
Liquidity risk
..
For the ECB, this higher liquidity can be reached just buying
bonds that EIB or other institutions transform into loans.
..
If necessary, the higher liquidity risk could be compensated
through lower liquidity risks in ECB operations not linked to the
EIB.
..
Anyway, from the point of view of containing inflation, less
liquidity in EIB operations can be clearly compensated by the
impact of these investments in growth.
On “risk-sharing”
.. Asset Purchase Program:
-
20% shared risk
80% risk in the national central banks
.. Unless a different agreement is achieved, the
agreed level of risk sharing should be applied or
taken into account.
On “risk-sharing”
.. For that purpose, member states could also get
involved in decisions / risks taken, through
different options.
.. A very clear option would be involving public
promotional banks or agencies in member states.
Interest rates
.. Key interest rates are, by themselves, main tools
for expansionary or restrictive monetary policies.
.. In theory, providing lower interest rates for
productive investments identified by EIB could be
by itself a way to promote a stronger relationship
between monetary expansion and industry or real
economy.
Interest rates
.. EIB: close to retail rates.
.. ECB: “key” interest rates. (Or government bonds
rates in APP Programme)
.. So, could it be an opportunity to provide real
economy not only with more funds but also with
lower rates?
Interest rates
.. Because of the AAA rating of EIB, ECB key interest
rates are not always lower than other alternative
funding for EIB.
.. But if the EIB tries to significantly expand its
resources, the rates differential would progressively
increase.
Interest rates
.. If necessary, EIB could make use of its balance sheet
for ECB funds only in the amount compatible with
the AAA qualification (and with cheaper funding),
and make use of a separate fund or entity for the
rest of the ECB funds.
Interest rates
THEORETICAL OPTIONS
A. Make use of key interest rates
B. Make use of rates close to retail market
C. Intermediate rates
Possible criterion: Starting from key rates, elevate
them as necessary to compensate for credit risk.
Interest rates
.. Another option: The Eurosystem / ECB
compensates credit risk of the operations
channeled through collaboration with EIB –directly
focused to real economy- with higher interest
rates in the rest of the operations.
Final remarks
So:
.. there are different ways to make compatible or
solve the differences in maturity, liquidity, risk and
usual interest rates of EIB and ECB
.. if appropriate, new maturity and risk criteria could
be established by the EIB-ECB Agreement for the
purposes of managing these resources, different
from the usual EIB and the usual ECB criteria.
Final remarks
.. Apart from the considerations before, it looks like, from a
macroeconomic point of view, credit focused in real
productive economy should be privileged by the
Eurosystem, both in accesibility and in interest rates. These
criteria should be taken into account when defining the
collaboration between EIB and ECB.
Final remarks
.. It looks like the main legal and technical issues concerning
the different options for the structural collaboration
between ECB and EIB can be easily solved.
..
The concretions and technical options should be analysed
and agreed between ECB and EIB.
..
These positions / criteria will be adapted as the Project
goes on, according to the institutional positions and the
evolution of the analysis.
European Economic and Social Committee
EUROPEAN INDUSTRY AND MONETARY POLICY
The role of the European Investment Bank
MAIN PROVISIONAL CONCLUSIONS
Bratislava
Nov 06 2015
1. Monetary policy should be more focused
.. Efficiency of Eurozone monetary policy transmission –
its link to real economy- should be improved
.. Particularly, making sure that resources get to the real
economy and do not stay remained in the financial
system, out of the Eurozone or in financial speculation
.. Without increasing the overall risk of the Eurosystem,
the highest proportion of monetary expansion should
finance productive activities, related to sustainable
growth.
2. Involving the EIB, a good solution
.. The involvement of the European Investment Bank
(EIB) or other public promotional banks or
agencies from the EU or the member states seems
to be a good way to improve the efficiency of
monetary expansion, its relationship with real
economy and with productive activities.
3. Better results with fewer resources and lower risk (I)
.. The collaboration ECB-EIB should increase the
efficiency of monetary policy and so, should make
possible that better results and impact in real economy
are achieved with a lower risk.
3. Better results with fewer resources and lower risk (II)
For this purpose:
A.
ECB and EIB should make an intensive use of the different positions
that EIB can take in monetary policy transmission without increasing
risks usually taken with banks:
-
Through loans channeled by EIB to banks
-
Providing funds to EIB and national promotional banks or agencies
in similar ways as they are provided to commercial banks.
-
Buying EIB and NPBs bonds or accepting them as collateral in
similar ways as government bonds are bought or accepted.
3. Better results with fewer resources and lower risk (III)
B. ECB and EIB could accept operating through EIB even
with a higher risk than in other ECB operations. It could
be acceptable taking account of the higher efficiency of
these funds from the point of view of monetary policy
transmission.
This higher risk with funds provided to EIB would be
compensated with lower risks directly taken with
commercial banks. This way, the overall Eurosystem
risk would not increase or would decrease.
3. Better results with fewer resources and lower risk (IV)
C. The ECB-EIB collaboration could go further. Systematic
advice from the EIB could be of the greatest
importance for a better focusing of the monetary
expansion, even in operations directly related to
commercial banks. This advice could be mainly related
to the conditionalities to be established when banks
receive funds generated in monetary expansion, to
ensure that these funds are channeled to real and
productive economy.
3. Legal issues can be solved (I)
..
Even with a restrictive interpretation of the
independence principle of the Eurosystem, the structural
collaboration between the Eurosystem and the EIB can be
implemented –by free decision of the ECB- through
different ways.
..
The ECB-EIB collaboration should be subjected to the
monetary policy objectives and, just for this purpose, it
should establish a more efficient transmission mechanism
between Eurosystem and money supply, stability of
prices, real economy and growth.
3. Legal issues can be solved (II)
ECB and EIB should work together in exploring the specific characteristic of this
collaboration. Some options can be envisaged:
..
Transferring resources to the EIB balance:
a) Directly: ECB loans to the EIB
b) Indirectly: Purchase by the ECB of debt issued by the EIB
..
Without transferring resources to the EIB balance:
Setting up a Fund managed by the EIB but under the
Eurosystem / ECB ownership
Setting up a fund –or an entity- managed and owned by the EIB
Making use of the EIB expertise through advice, formal
reports or delegation in allocation of resources.
4. Technical issues can be solved (I)
..
Risk-sharing: Through the involvement of public
promotional banks or agencies in member states
..
Interest rates: The differential in rates is more an
opportunity than a problem
..
Liquidity: Through EIB bonds and/or more liquid
investments in the rest of monetary expansion
operations.
5.Why not a Collaboration Agreement between ECB and
EIB?
..
An adequate framework for a structural collaboration
..
It reflects that the collaboration obeys to the free decision of
both institutions and so, that their independence is fully
respected.
..
There are similar Collaboration Agreements between the EIB
and other European institutions.
..
It may be an adequate framework for sharing views, strategic
and operational issues and establishing a climate of mutual
collaboration.
6. On the role of the European Parliament
.. The European Parliament, as representative of the
general interest of the European people, and
according to its interinstitutional role, should be the
adequate body to take the initiative in promoting this
kind of mutual collaboration between the ECB and
the EIB.
.. In this way, the European Parliament should make
sure that the EU institutions adequately develope
their main functions both in investment policy and
in monetary policy.
7. On the role of the European Central Bank (ECB) and
the European Investment Bank (EIB)
.. Of course, as parts of the collaboration we
propose, ECB and EIB should play an active role in
starting the necessary negotiations to prepare the
collaboration agreement.
7. On the role of the European Central Bank (ECB) and
the European Investment Bank (EIB)
..
In particular, the Board of Governors of the ECB and the Board
of Governors of the EIB should take a declarative decision in
favor of such an approach. For that aim, a common working
group should be created between ECB and EIB so as to clarify
the interest and the feasibility of the proposed collaboration
and, in other case, to propose alternative measures to
improve the efficiency of the transmission of Eurozone
monetary policy to the real economy. In particular, EU
institutions should guarantee that monetary expansion is
adequately committed to real economy, development and
growth.
Thank you for your attention
European Economic and Social Committee
EUROPEAN INDUSTRY AND MONETARY POLICY
The role of the European Investment Bank (EIB)
PRESENTATION OF THE PROJECT
Bratislava
Nov 06 2015