On Friday, Jean-Claude Trichet, President of the European Central Bank (ECB) delivered a speech at an international symposium marking the 50th anniversary of Bank Al-Maghrib, the central bank in Marrakech, Morocco. In his speech he addressed some of the measures the ECB has adopted to address the current global financial crisis.
Mr. Trichet noted the particular challenges that the ECB and other central banks have faced since the onset of the financial crisis. The ECB in many respects has taken the lead in addressing the crisis by implementing some “exceptional decisions.” Since October 2008, the ECB’s Governing Council has lowered the key interest rate by 325 basis points, which reflects the largest cut ever implemented in such a short period of time within Europe. In addition to reducing key interest rates, the ECB has adopted many ‘non-standard’ measure and new modes of liquidity provision. After the crisis intensified and interbank lending virtually froze the ECB “started to provide refinancing well above the levels that banks had absorbed to fulfil[l] their reserve requirements in normal times” which comprised of three main key elements:
- Adoption of regular refinancing operations. The ECB adopted “a ‘fixed rate full allotment’ tender procedure" and significantly expanded the maturity of its operations under which financial institutions “have been granted access to essentially unlimited liquidity at our policy interest rate at maturities of, initially, up to six months.”
- Extensive list of eligible collateral. The ECB has a diverse list of assets that it will accept as collateral. This list has been extended throughout the crisis to grant borrowers greater flexibility.
- Diverse number of participating counterparties. The ECB has a large number of counterparties that participate in its refinancing options.
In the most recent meeting of the ECB’s Governing Council that took place on May 7, the ECB adopted measures to enhance its present liquidity long term refinancing operations by extending the length of the maturity at which it will provide banks with liquidity at fixed rates and full allotment. In addition, the European Investment Bank (EIB) will now serve as an eligible counterparty in the Eurosystem’s monetary policy operations and “will purchase euro-denominated covered bonds issued in the euro area.” The ECB anticipates to “engage in a programme of around €60 billion that targets an important segment of the private securities market, which has been particularly affected by the financial market turbulence.”
Mr. Trichet also noted that the ECB’s response to the crisis has been crafted to address the “financial and economic structures of the euro area,” which is strongly bank-based unlike the U.S. financial system which is market-based. For example presently “recourse to banks makes up more than 70% of non-equity external finance in the euro area,” while in the United States the “equivalent proportion is only around 30%.” Mr. Trichet emphasized that within the European market “guaranteeing steady access to credit for households and companies largely means preserving the viability of the banking system." Since Banks play such a dominant role in the European economy, he noted that it was appropriate to focus the ECB's non-standard measures on the banking sector.
Mr. Trichet attributed the divergence in the “responses by central banks to the crisis as exemplified by the approaches of the ECB and the Federal Reserve System of the US” to the inherent differences in the U.S. and European financial and economic structures. Such differences in approaches is also exemplified in a recent speech delivered by of Ben Bernanke, Chairman the Federal Reserve. However, Mr. Trichet emphasized that “these variations do not reflect conflicting views on fundamental principles or objectives,” but rather given the different frameworks the measures implemented must be different “to achieve the same objective.”
In his concluding remarks, Mr. Trichet urged central banks around the word to unite and “draw, systematically and without complacency, the lessons of the global crisis that we are fighting against” and reinforce the resilience of the global financial system and the soundness of the real global economy.”