2.3 Monetary policy continued to be implemented using a wide range of tools
The Eurosystem maintained favourable financing conditions in the euro area in 2021 by continuing with most of the measures that had been introduced in 2020 due to the COVID-19 crisis. The Eurosystem arranged longer-term refinancing operations (LTROs) for banks on favourable terms, retained the pandemic-related collateral easing measures for central bank credit, continued large-scale securities purchases and maintained swap lines between central banks.
The Bank of Finland is responsible for implementing the Eurosystem’s monetary policy in Finland. The Eurosystem’s monetary policy implementation uses an assortment of tools that can be classified as standard and non-standard measures.
The Eurosystem’s standard measures are: regular refinancing operations conducted as tender procedures against collateral; standing facilities; and the minimum reserve requirement. Standard monetary policy measures primarily influence short-term market rates.
The Eurosystem’s non-standard measures include: asset purchase programmes; loans through longer-term refinancing operations; and changes in collateral policy. These have been at the heart of monetary policy particularly in the period since the global financial crisis and have allowed the Eurosystem to maintain favourable financing conditions in the euro area, also in 2021.
Interest rates remained historically low
The Eurosystem’s deposit facility rate and also the main refinancing rate and marginal lending facility rate were held throughout 2021 at their lowest ever levels, at –0.50%, 0.00% and 0.25%, respectively (Chart 9).
Since its meeting of 22 July 2021, the ECB’s Governing Council has communicated, in line with its monetary policy strategy updated on 8 July 2021, that these policy rates will remain at their present or lower levels until it sees inflation reaching 2% well ahead of its projection horizon and durably for the rest of the projection horizon.
This may change only if the Governing Council considers that the trend in underlying inflation has been sufficient to expect inflation to stabilise at 2% over the medium term. Inflation may also be moderately above the target for a transitory period.
Nowadays banks have considerable holdings with central banks, and so the deposit rate is the Eurosystem’s most important policy rate, as it guides the shortest market rates.
The €STR (euro short-term rate) and the EONIA (euro overnight index average) fixed to it, as well as longer term reference rates such as the 3-month and 12-month Euribor (euro interbank offered rate), fluctuated within a narrow range close to the ECB deposit rate during the entire year. As part of the reshaping of euro area reference rates, the EONIA was discontinued as planned at the start of 2021.
Bank of Finland’s monetary policy counterparties unchanged
To operate as counterparties in monetary policy operations, credit institutions are required to hold a minimum level of reserves, to be subject to financial supervision, to be financially sound and to fulfil operational requirements.
The Eurosystem updated its counterparty requirements by adding a leverage ratio as a measure of financial soundness. Stemming from the leverage ratio was a requirement in line with the EU’s Capital Requirements Regulation concerning own funds, which is binding on credit institutions.
The Bank of Finland’s monetary policy counterparties remained unchanged. At the close of 2021 these numbered 16. They comprised Finnish credit institutions and branches of Nordic banks operating in Finland.
Counterparties may seek collateralised financing from the Eurosystem by participating in Eurosystem refinancing operations. Counterparties may also receive overnight credit against eligible collateral through the ECB’s marginal lending facility for repayment the next business day. Intraday credit, to ensure smooth payment flows, is similarly available against collateral. Counterparties may also make deposits with the central bank.
The Eurosystem has specified eligibility criteria for accepted collateral in central bank credit operations. These criteria are outlined in the ECB’s guidelines and are the same throughout the euro area.
In addition, the Bank of Finland has supplemented the ECB’s guidelines with additional domestic requirements for its own counterparties. It updated the rules for counterparties and customers four times during the year.
Longer-term refinancing operations continued to provide considerable financing on easier terms
Non-standard refinancing operations with a longer maturity were an important element of the Eurosystem’s action to maintain favourable financing conditions in 2021 as the euro area economy recovered from the difficulties caused by the COVID-19 pandemic.
Under the third series of targeted longer-term refinancing operations (TLTRO III) (in Finnish) begun in 2019, four quarterly operations were conducted in 2021.
TLTRO loans were still given on reduced terms, in line with the 2020 decision of the ECB’s Governing Council.
The eligible loan stock is 55% of a counterparty’s loans to the non-financial private sector as at the end of February 2019, excluding loans to households for house purchase. The loan maturity is three years.
The interest rate on TLTRO loans is lower for banks that increase their net lending to households and businesses during the reference period in relation to the benchmark. The lowest rate up to June 2022 is 0.50 percentage points below the average ECB deposit facility rate. The Eurosystem has never previously granted central bank credit at an interest rate lower than the ECB’s deposit rate.
The Eurosystem also conducted four pandemic emergency longer-term refinancing operations (PELTROs), offering financing with a maturity of approximately one year.
The PELTROs were conducted as fixed rate tenders with full allotment. The average rate for each operation was 0.25 percentage points below the average main refinancing rate for the maturity of the PELTRO in question.
Banks continued to be especially active in participating in TLTROs. In 2021, the amount of outstanding Eurosystem liquidity-providing operations increased from about EUR 1,800 billion to over EUR 2,200 billion. This figure consists almost solely of TLTROs.
At the close of 2021, Finnish banks had outstanding TLTRO credit totalling EUR 36 billion, whereas a year earlier this figure was EUR 22 billion.
The number of TLTRO participants again remained relatively high. For example, 425 Eurosystem banks participated in the March TLTRO.
The banks also had the opportunity to bring forward the repayment of some of their TLTRO III credit in September and December 2021. At the Eurosystem level, banks’ repayments on this basis totalled almost EUR 140 billion. Finnish banks did not take part in this early repayment.
At its meeting of 16 December 2021, the ECB’s Governing Council did not make a decision on introducing any new TLTROs or PELTROs in 2022. However, it did declare that it will reassess the TLTRO situation at regular intervals. It also announced it would continue monitoring the financing conditions for banks and would seek to ensure that the maturing of TLTROs does not interfere with the transmission of monetary policy.
Demand for dollar-denominated refinancing operations decreased to its low pre-pandemic level
The Eurosystem ensured the availability of globally important currencies by maintaining existing arrangements with other central banks. The permanent currency swap arrangements between the Eurosystem and the central banks of the United States, the United Kingdom, Japan, Switzerland and Canada remained unchanged.
The Eurosystem continued to offer dollar-denominated financing at the March 2020 reduced rate during 2021.
The Governing Council of the ECB nevertheless decided in April 2021 to suspend three-month dollar refinancing operations from 1 July 2021. The price of dollar-denominated financing in the market had decreased and availability had improved. Demand for dollar-denominated financing in refinancing operations had declined significantly. The three-month operations can nevertheless be re-introduced if necessary.
The demand for dollar-denominated refinancing operations in 2021 was distinctly lower than in 2020.
No Bank of Finland counterparties participated in these operations in 2021.
The Eurosystem again ensured that euro-denominated liquidity needed during the pandemic crisis remained available outside the euro area as well. In line with the Governing Council’s earlier decision, the following are in force until March 2022: the EUREP repo facility begun in 2020 for central banks outside the euro area; the swap lines agreed with the central banks of Croatia and Bulgaria; and the bilateral repo lines agreed with the central banks of Albania, North Macedonia, Romania, San Marino, Serbia and Hungary.
Barely any demand for standard refinancing operations
The Eurosystem conducted main refinancing operations on a weekly basis and also carried out regular three-month longer-term refinancing operations, again in the form of fixed-rate tenders with full allotment. These refinancing operations will continue to be conducted in this way for as long as is necessary.
Banks satisfied their borrowing needs in the Eurosystem during 2021 by participating in longer-term and more favourable non-standard liquidity operations in particular. Little credit was sought from standard operations.
Liquidity surplus grew even larger
Excess liquidity in the euro area banking system, i.e. banks’ current account holdings with central banks in excess of the minimum reserve requirement, increased by about EUR 800 billion in 2021, to a total of approximately EUR 4,100 billion (Chart 12).
Current account holdings with the Bank of Finland in excess of the minimum reserve requirement in 2021 averaged EUR 151 billion, compared with EUR 104 billion in 2020. The minimum reserve requirement was, on average, only about EUR 4 billion. At the end of 2021, these holdings amounted to EUR 125 billion, compared with EUR 111 billion in 2020 (Chart 13).
The increase was due especially to the continuing Eurosystem securities purchases as a result of the pandemic, and the banks’ higher levels of TLTRO credit.
As a proportion of the total excess liquidity deposited across the Eurosystem, the holdings deposited with the Bank of Finland in excess of the minimum reserve requirement declined slightly from the previous year, to an average of 3.6%.
The ECB’s deposit facility rate is paid on most of the excess liquidity, but the two-tier system for reserve remuneration introduced in October 2019 allows for an exempt tier to be remunerated at 0.00%.
The extent of this tier (six times the minimum reserve requirement) remained constant during 2021.
Finnish banks made almost full use of the tier exempted from the negative rate under the two-tier system for reserve remuneration.
At its meeting of 16 December 2021, the ECB’s Governing Council stated that it would assess the appropriate calibration of the two-tier system for reserve remuneration. This was to ensure that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.
Eurosystem continued pandemic-related collateral easing measures
The ECB’s Governing Council took several decisions in 2020 concerning collateral for central bank credit in order to ensure that banks retained access to central bank refinancing facilities even in difficult situations. The Governing Council decided in December 2020 to extend the duration of the collateral easing measures until June 2022.
These temporary measures introduced earlier in 2020 included a 20% reduction in haircuts for eligible assets. This means the same collateral could be used to obtain more credit from the central bank.
The Eurosystem also updated its collateral framework in 2021. It began, for example, to accept (in Finnish) as collateral marketable assets for which the coupon rate is linked to sustainability performance targets.
The Bank of Finland maintained its domestic measures for ensuring the availability of adequate collateral. The additional credit claim framework introduced in autumn 2020 remained unchanged during 2021, with the exception of extensions to the time for granting guarantees approved in the framework.
Further rise in amount of collateral deposited
The total amount of collateral deposited with the Eurosystem increased again in 2021. The rise was slower than in the previous year, however. In 2020, the total grew by about 47%, while in 2021 it was up by 21% year on year (Chart 15).
In 2021, banks deposited collateral averaging a total value of approximately EUR 2,800 billion with the Eurosystem’s central banks; in 2020, the corresponding figure was about EUR 2,300 billion.
The amount of collateral deposited by Bank of Finland counterparties increased further during 2021. This amounted to an average value of about EUR 40 billion in 2021, compared with approximately EUR 27 billion in 2020.
The average amount of excess collateral from Bank of Finland counterparties was 20%. This represents the proportion of the value of the collateral deposited with the Bank of Finland which is in excess of the outstanding amount of credit.
Most popular collateral classes are still credit claims and covered bank bonds
There were some minor changes in the composition of the collateral deposited with the Eurosystem in terms of asset classes. Securities issued by central government bodies, covered bank bonds and credit claims each accounted for a slightly higher share of the total collateral than a year earlier.
In the case of credit claims, this was due, among other things, to the expansion of the additional credit claims frameworks of national central banks undertaken during the pandemic. The lowering of haircuts on credit claims and the resulting rise in collateral value were further factors.
Credit claims were in fact the most common form of asset used as collateral in the Eurosystem (32% of all collateral). The next most popular asset class was covered bank bonds (25%), and ranked third was securities issued by central government bodies (16%).
Covered bonds issued by banks were especially common as collateral among the Bank of Finland’s counterparties. Their share of all collateral deposited grew to as much as 53% (Chart 8).
The second most common form of collateral among the Bank of Finland’s counterparties was credit claims (23%), and the third was securities issued by central and regional government bodies (9%).