This may mean that the central bank purchases riskier securities not AAA rated to the detriment of safer securities AAA. In doing this, the central bank reduces the amount of risk on the balance sheets of the banks from which it has acquired these higher-risk securities.
A final type of unconventional monetary policy involves conducting an easing policy that is both qualitative and quantitative: credit easing, i. Unconventional monetary policies that are often attributed to the ECB include operations to provide long-term liquidity 3 years at low interest rates, as was done in November and February , and which were described as very long-term refinancing operations VLTRO.
But were these really unconventional large-scale operations? On the one hand, these operations involved not trillions of euros but an amount closer to billion, which is not negligible after correcting for bank repayments to the ECB. Finally, these operations were partially sterilized: the loans granted by the ECB to the commercial banks were offset by sales of securities by the ECB, thereby altering the structure of its assets. The situation is different for the Securities Market Programme mechanism, which consisted, on the part of the ECB, of purchasing government debt on the secondary markets during the sovereign debt crisis.
Given the different definitions of unconventional policy in current use, it is helpful to recall that the ECB explicitly indicates the amounts it has agreed within the framework that it sets for its unconventional policies, which are called Securities held for monetary policy purposes.
These amounts are graphed in the figure below. They show the frequency and magnitude of the monetary activities that the ECB itself defines as unconventional. Another source was less sure the new staff forecasts would merit policy action but confirmed a package was under discussion should the Council decide to act.
This could be announced in June with a view to coming into operation late this year, two sources said. The idea behind this second option is to build the market in Europe for SME loans bundled as ABS, with a view to making it larger and more liquid to aid the flow of credit to the smaller firms that form the backbone of the euro zone economy. While developing this purchase plan, the ECB is also lobbying banking regulators in Basel to loosen the capital requirements on banks holding high-grade ABS.
One of the five sources said the ABS purchase idea was on the table but, because it would take time to make it operational, the measure might not be announced in June. Asked how conditionality of banks increasing lending to SMEs could be enforced, he said that there could be for example a 4-year LTRO at a fixed rate of 25 basis points with an interest rate penalty if a bank did not meet the conditions.
The tools being prepared are consistent with measures Draghi identified in an April 24 speech in which he explained how the ECB would respond to three broad scenarios. To respond to a de facto tightening of monetary policy caused by market moves like further euro gains, Draghi indicated the ECB could cut rates. To deal with problems transmitting its policy to all parts of the euro zone, he said the bank could deploy an LTRO targeted at encouraging bank lending or an ABS purchase programme.
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