Phase-out of Pandemic Coverage Relaxation Measures
Published as part of the ECB Economic Bulletin, issue 3/2022.
Collateral easing measures have played a key role in the ECB’s monetary policy response to the coronavirus (COVID-19) pandemic, facilitating access to Eurosystem credit operations. The temporary guarantee measures (summarized in Chart A) were introduced in April 2020 to ensure that the banking sector can expand its access to central bank liquidity on favorable terms through the liquidity-providing credit operations of the Eurosystem (mainly targeted longer-term refinancing operations or TLTRO III), enabling it to continue to cover the financing needs of the euro area economy. More specifically, these measures have been introduced to serve the following three main interrelated objectives.
- Anticipate shortages of eligible guarantees: all measures have been introduced as a preventive measure to avoid shortages of eligible collateral in the event of increased demand for liquidity. This has facilitated banks’ access to ample central bank liquidity on favorable terms, contributing to the mass adoption of TLTRO III, thereby transmitting the smooth stimulus to the wider economy.
- Added flexibility to the warranty framework: some of these measures have provided national central banks (NCBs) with additional flexibility to meet the collateral needs of national banks, for example by allowing lending with state/public sector guarantees under COVID-19 schemes. 19 which were not fully compliant with the requirements of the general guarantee guarantee framework to be mobilized under the national supplementary credit claims (ACC) frameworks.
- Countering unwanted procyclical feedback effects: Falling asset prices and potential rating downgrades may have increased pressure on the availability of collateral, potentially creating uncertainty about individual banks’ access to central bank liquidity. In order to avoid pro-cyclical feedback loops and ultimately preserve and restore lending conditions favorable to the real economy, a number of measures have therefore been introduced. These included maintaining the eligibility of certain marketable assets which met the minimum credit quality requirements on 7 April 2020 but whose credit ratings subsequently deteriorated below the minimum rating threshold (the “credit freeze”). ‘eligibility’) and the temporary reduction of valuation haircuts.
Coverage relaxation measures in response to the COVID-19 pandemic
The ECB’s collateral easing measures have largely contributed to increasing the volume of eligible collateral. Overall, ECB staff estimates indicate that the total value of collateral attributable to the easing measures amounted to around €285 billion (around 10%) of the total €2,794 billion in guarantees mobilized at the end of February 2022. This means that they contributed around 23% of the total increase in collateral positions of 1,236 billion euros (Chart A). The contribution from the collateral easing measures was mainly due to the temporary haircut reduction and the extensions of the NCBs’ ACC arrangements, which together accounted for more than 90% of the total effect.
Mobilization of collateral and recourse to Eurosystem credit operations
Dismantling in three steps
On March 24, 2022, the Board of Governors announced its decision to phase out the pandemic safeguards relaxation measures. This decision reflects the expected decline over time in banks’ demand for liquidity as TLTRO III operations gradually mature. The ECB also assessed the effectiveness of the various measures from a financial risk perspective, expressed in terms of the temporary expansion of collateral relative to the evolution of the Eurosystem’s risk protection. In particular, the temporary haircut shows a higher ratio of financial risk per unit of exposure than other collateral easing measures. The assessment further examined to what extent the specific initial policy motivation was still relevant, for example in allowing banks to mobilize collateral faster through reduced reporting requirements.
The phasing out is planned in three stages and gives banks time to adapt to adjustments to the collateral framework.
As a first step, from 8 July 2022, the ECB will halve the temporary reduction in collateral valuation haircuts on all assets, from the current adjustment of 20% to 10%. This allows for a gradual restoration of pre-pandemic risk tolerance levels and reduces the Eurosystem’s financial risks associated with the haircut reduction. The haircut represents approximately 40% of the total value of the collateral generated by the collateral relaxation measures. The partial reversal provides adequate time for banks to adjust their collateral mobilization. The ECB will also phase out a set of measures whose impact and scope are more limited: i) the ECB will no longer maintain the freezing of the eligibility of downgraded marketable assets; ii) the ECB will restore the limit of unsecured debt securities issued by any other banking group in a credit institution’s collateral pool from 10% to 2.5%; iii) The ECB will phase out the temporary relaxation of several technical requirements for ACC eligibility, mainly with regard to the full restoration of the frequency of reporting requirements at the level of ACC loans for pools, as well as reporting requirements. acceptance of banks’ own credit assessments by internal rating systems.
As a second step, in June 2023, the ECB plans to implement a new scale of valuation haircuts based on its pre-pandemic risk tolerance level for credit transactions, completely removing the temporary reduction in valuation haircuts. valuation of guarantees. Details of the new haircut schedule will be announced in due course and will be based on the results of the next regular review of the ECB’s risk control framework.
In the third stage, in March 2024, the ECB will, in principle, remove the remaining pandemic safeguards relaxation measures. The Governing Council will take the final decision following a comprehensive review of the ACC frameworks, taking into account the collateral needs of banks to continue participating in Eurosystem credit operations, including transactions TLTRO III until December 2024. Measures in place until March 2024 include acceptance of various ACCs put in place during the pandemic, including loans guaranteed by the State and certain public sector entities. These have significantly contributed to the availability of guarantees since the start of the pandemic. Specifically, secured loans mobilized represent approximately 40% of the total value of collateral generated by collateral easing measures. NCBs may nevertheless decide to terminate all or part of their ACC frameworks earlier, for example if their use is limited.
The minimum credit quality exemption for Greek government bonds must be maintained
The Governing Council has decided to continue to allow NCBs to accept Greek government bonds (GGBs) that do not meet the minimum Eurosystem credit quality requirements, but meet all other eligibility criteria for applicable securities. This applies at least as long as reinvestments in GGBs under the Pandemic Emergency Purchase Program (PEPP) continue. The Board of Governors introduced this waiver for the use of GGBs as collateral on 7 April 2020, on a temporary basis and subject to a specific haircut schedule, following the inclusion of GGBs in the PEPP, which was agreed on March 18, 2020. The extension of the measure is based on multiple additional considerations, including the need to continue to prevent fragmentation of access to Eurosystem monetary policy operations, which would impair the proper functioning of the transmission of the policy to the Greek economy as it is still recovering from the pandemic. Other considerations include that Greece remains subject to regular post-programme reviews of its economic and financial situation and benefits from disbursements under the Recovery and Resilience Facility, subject to the successful implementation of its reform program.
The Eurosystem’s monetary policy framework grants the Governing Council the discretionary power to deviate from the assessments of credit rating agencies (CRAs) if justified, thus avoiding a mechanical dependence on their ratings. The discretion to avoid the mechanistic use of ratings from credit rating agencies is set out in Article 159 of the ECB’s general documentation for the implementation of monetary policy. It is consistent with Principle III.1 of the Financial Stability Board Principles for Reducing Reliance on Rating Agency Ratings. Previous examples of the application of this discretion include waivers of minimum credit quality requirements for several countries during the eurozone sovereign debt crisis. Another example is the eligibility freeze adopted on April 22, 2020 and phased out from July 8, 2022, as described above.