On July 13, in a keynote address before the University of Munich, Jean-Claude Trichet, President of the European Central Bank (ECB), discussed the ECB’s ongoing “unprecedented actions” in the current economic environment. According to Mr. Trichert, the ECB’s “bold” responses to the financial crisis have helped contribute to the fact that “since the crisis began, not one systemically important financial institution has collapsed in the euro area.”

Mr. Trichet further emphasized that, since the financial crisis intensified in September 2008, the ECB has “taken monetary policy measures that are unprecedented in terms of their nature, scope and magnitude.” In this vein, Mr. Trichet spoke of the ECB’s recent efforts, most notably the broadening of a policy toolkit referred to as “enhanced credit support.” These enhanced credit support measures “are being taken to enhance the flow of credit above and beyond what could be achieved through policy interest rate reductions alone.” According to Mr. Trichert, there are five building blocks to these measures:

  1. Fixed Rate Tenders with Full Allotment. The ECB’s primary concern is to maintain the “availability of credit for households and companies at accessible rates.” To meet this objective, the ECB designed the fixed rate full allotment tender procedure to “ensure the effectiveness of monetary policy transmission at a time when borrowing through interbank transactions had become abnormally elevated for many financial institutions.”
  2. Expanded List of Eligible Collateral. Since the financial crisis, the ECB has enlarged its list of eligible collateral. This “modern collateral framework” prepared the ECB for the financial crisis and has “considerably eased banks’ liquidity constraints during the crisis.”
  3. Lengthening of Refinancing Operations Maturities. Recently, the ECB began to provide liquidity for up to one year. When the ECB lengthened the maturities to up to six months in June, “a record amount of €442 billion of liquidity [was] supplied to the euro area’s banking system.” However, it will take time before this extra liquidity becomes credit. Mr. Trichert also cautioned that “banks will have to gain experience in using the longer-term credit that they obtain from their central banks to expand their longer-term assets rather than increase the availability of short-term liquidity.”
  4. Liquidity in Foreign Currencies. The ECB is currently providing liquidity in foreign currencies, especially in U.S. dollars, to “avoid any shortages and ... ease liquidity tensions in the global markets.”
  5. Outright Purchase of Covered Bonds. The ECB chose to purchase covered bonds because they were a major source of funds for banks before the financial crisis. According to Mr. Tichert, “the Governing Council came to the conclusion that the Eurosystem could help to revive this market, in terms of liquidity, issuance and spreads, by engaging in outright purchases of covered bonds.”