2.3 Eurosystem began phasing out its non-standard monetary policy measures during 2022

In 2022, the Eurosystem began normalising its monetary policy. It raised its key interest rates, stopped increasing its monetary policy securities holdings, began gradually phasing out its pandemic collateral easing measures, and tightened the conditions of its longer-term refinancing operations.

The Bank of Finland is responsible for implementing the Eurosystem’s monetary policy in Finland. The tools for implementing this monetary policy can be divided into standard and non-standard measures.

The Eurosystem’s standard measures are: standing facilities; regular refinancing operations conducted as tender procedures against collateral; 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 measures have been at the heart of monetary policy since the start of the global financial crisis in 2007, continuing through to the COVID-19 pandemic crisis. In 2022, the Eurosystem began phasing out these non-standard measures as part of an overall normalisation of monetary policy.

Interest rates were raised sharply in 2022

The Governing Council of the European Central Bank (ECB) raised its key interest rates four times in 2022, starting in July. Each of the key rates was raised by altogether 2.5 percentage points during the year. The Eurosystem’s deposit facility rate, main refinancing operations rate and marginal lending facility rate stood at 2.00%, 2.50% and 2.75%, respectively, at the end of the year (Chart 5).

At its December meeting, the Governing Council signalled it would continue to raise interest rates significantly higher at a steady pace. This is to ensure a timely return of inflation to the 2% target.

The Governing Council also announced that by the end of 2023 it would review its operational framework for steering short-term interest rates.

The euro short-term rate (€STR) closely tracked the movement of the ECB’s deposit facility rate. However, the pass-through of higher interest rates to the repo market was hindered by collateral scarcity, among other issues. The Governing Council helped relieve the collateral shortage by increasing the upper limit for securities lending against cash collateral.

Longer term reference rates such as the 3-month and 12-month Euribor (euro interbank offered rate) rose on the back of higher interest rate expectations and stood at 2.13% and 3.29%, respectively, at the end of the year.

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.

At the close of 2022, the Bank of Finland had 16 monetary policy counterparties. These counterparties remained unchanged from the previous year. 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 assets 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 assets that can be used as 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. The Bank of Finland updated these requirements three times during 2022.

Substantial repayments of longer-term refinancing operations in 2022

The Eurosystem continued to conduct its weekly main refinancing operations (MROs) and monthly three-month longer-term refinancing operations (LTROs) as fixed-rate tender procedures with full allotment.

Demand for these operations still remained very low in both the Eurosystem and Finland.

The Eurosystem did not conduct new targeted longer-term refinancing operations (TLTROs) in 2022.

The first two operations conducted under TLTRO III matured in 2022, resulting in EUR 54 billion of repayments by banks at the Eurosystem level.

In addition, banks had the option of making early repayments of TLTRO III operations in March, June, September, November and December. At the Eurosystem level, banks’ early repayments totalled EUR 826 billion, with EUR 6 billion paid by Finnish banks.

The outstanding volume of TLTRO III operations shrank during the year from EUR 2.198 trillion to EUR 1.318 trillion at the Eurosystem level, and from EUR 36 billion to EUR 30 billion for Finnish banks.

At its meeting on 27 October, the Governing Council decided to adjust the interest rate conditions of its outstanding TLTRO III operations. Starting from 23 November 2022, the interest rate is to be indexed to the average applicable key ECB interest rates between that date and the repayment date of the TLTRO III. The Governing Council also decided on additional voluntary early repayment dates for banks.

The recalibration of the TLTRO III terms and conditions will contribute to the pass-through of higher interest rates to bank lending and bank funding costs. With the methodological change, the interest rates on outstanding TLTRO III operations now respond more swiftly to changes in the key ECB interest rates. The decision contributes to the overall normalisation of monetary policy that is being conducted to restore price stability.

After the revised TLTRO III conditions came into effect, euro area banks increased their voluntary early repayments in November and December.

The Governing Council is monitoring the impact of TLTRO III repayments on the overall stance of monetary policy.

The amount of outstanding pandemic emergency longer-term refinancing operations (PELTROs) was very small in 2022, with the final operation due to mature in early 2023.

ECB maintained liquidity arrangements with other central banks in 2022

In 2022, 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 US dollar-denominated financing at the March 2020 reduced rate during 2022. As in previous years, the demand for US dollar-denominated refinancing remained low.

The Eurosystem again ensured that euro-denominated liquidity remained available outside the euro area as well.

The ECB decided to continue its repo facility for non-euro area central banks (EUREP, Eurosystem repo facility for central banks), its bilateral swap line with Poland’s central bank agreed in March, and its bilateral repo lines with the central banks of Albania, Andorra, Hungary, North Macedonia, Romania and San Marino, until 15 January 2024.

The Eurosystem also extended its bilateral currency swap arrangement with the central bank of China until 8 October 2025.

Liquidity surplus in euro area banking system began to shrink

Excess liquidity in the euro area banking system, i.e. banks’ liquidity holdings with central banks in excess of the minimum reserve requirement, decreased from about EUR 4.390 trillion during the final reserve maintenance period of 2021 to approximately EUR 4.080 trillion during the corresponding period of 2022 (Chart 8).

Excess current account holdings with the Eurosystem are remunerated at the lower of either the Eurosystem deposit facility rate or 0%. With the deposit facility rate being raised above 0%, banks began almost exclusively holding their excess liquidity with the Eurosystem’s deposit facility (as overnight deposits) from the sixth maintenance period onwards, rather than holding excess liquidity in their central bank current accounts (Chart 8).

The euro area’s total excess liquidity continued to grow in the early part of the year, especially as net asset purchases were still ongoing, but began to shrink towards the end of the year due to TLTRO III repayments.

Liquidity holdings with the Bank of Finland in excess of the minimum reserve requirement in 2022 averaged EUR 148 billion, compared with EUR 151 billion in 2021. The minimum reserve requirement was, on average, only about EUR 3.8 billion (Chart 9).

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 shrank slightly from the previous year, to an average of 3.3%.

The Governing Council suspended its two-tier system for the remuneration of excess reserves in September, as it was seen as redundant with the deposit facility rate having been raised above 0%.

Finnish banks made almost full use of the tier exempted from the negative rate (six times the minimum reserve requirement) right up until the suspension of the two-tier system.

At its meeting on 8 September 2022, the Governing Council decided to remove the 0% interest rate ceiling for the remuneration of central government deposits. The new ceiling is now the lower of either the Eurosystem’s deposit facility rate or the euro short-term rate (€STR). The decision is temporary and is intended to remain in effect until 30 April 2023.

The aim of the decision is to preserve the effectiveness of monetary policy transmission and safeguard orderly market functioning, as well as to prevent an uncontrolled outflow of government deposits into the money market.

At its meeting on 27 October 2022, the Governing Council decided to set the remuneration of minimum reserves at the deposit facility rate instead of the main refinancing operations rate as of 21 December 2022. The deposit facility rate better reflects the rate at which funds can be invested in money market instruments if not held as minimum reserves and the rate at which banks borrow funds in the money market to fulfil minimum reserves.

Phasing out of pandemic collateral easing measures begun

In March 2022, the ECB’s Governing Council decided to begin gradually phasing out its package of pandemic collateral easing measures introduced in April 2020.

As a first step starting on 8 July 2022, collateral valuation haircuts across all eligible assets were restored closer to pre-pandemic levels. The limit on the use of unsecured bank bonds as collateral was also reduced to its previous level of 2.5%.

The grandfathering of the eligibility of marketable assets that fulfilled minimum credit quality requirements on 7 April 2020 was suspended, and certain easing measures in domestic additional credit claim (ACC) frameworks were removed. In addition, a number of technical amendments announced by the ECB in May 2022 were incorporated into the Eurosystem’s collateral framework.

As part of the phasing out of pandemic easing measures, the Bank of Finland decided to remove the eligibility of credit claims backed by government or public sector COVID-19 guarantees from its ACC framework as of 8 July 2022.

In July 2022 the Governing Council also decided on further steps to include climate change considerations in the Eurosystem’s monetary policy framework Some of these measures will also affect the Eurosystem’s collateral framework in the coming years.

Amount of collateral pledged began to decline

The total amount of collateral provided to the Eurosystem stopped growing and instead began to decrease in 2022 (Chart 10). In 2022, banks deposited collateral averaging a total value of approximately EUR 2.700 trillion with the Eurosystem’s central banks; in 2021, the corresponding figure was about EUR 2.800 trillion.

Collateral deposited with the Bank of Finland by the Bank’s counterparties in 2022 amounted to an average value of about EUR 40 billion, which was more or less unchanged from the previous year.

The amount of collateral deposited began to shrink towards the end of the year, however, as banks repaid their longer-term refinancing operation borrowing.

The average amount of excess collateral from Bank of Finland counterparties declined to about 15% (-5%). Excess collateral 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.

Credit claims and covered bank bonds were the most common collateral classes

The composition of the collateral deposited with the Eurosystem remained largely unchanged in terms of asset classes in 2022.

Credit claims remained the most common form of asset used as collateral in the Eurosystem (33% of all collateral). The next most popular asset class was covered bank bonds (25%), and third was asset-backed securities (15%).

Covered bonds issued by banks were especially common as collateral among the Bank of Finland’s counterparties (Chart 11). Their share of all collateral deposited with the Bank of Finland continued to grow, reaching 61% (+8%). The second most common form of collateral was credit claims (19%), although their share did slightly decrease (-4%) from the previous year. Uncovered bank bonds were the third largest collateral component (7%).