Expanding the Eurosystem’s monetary operations supports financial markets and lending
In response to the COVID-19 crisis, the Eurosystem (the ECB and the national central banks in the euro area) has expanded its monetary operations to facilitate funding the economy as much as possible. For example, it has expanded its lending to banks through refinancing operations. Among these, the most important ones are the Targeted Longer-Term Refinancing Operations (TLTROs), in which banks participate to the amount of EUR 1,570 billion. TLTROs enable banks to obtain funding from the Eurosystem on favourable terms, on the condition that they maintain their levels of lending to firms and households. In addition, the Eurosystem has temporarily eased eligibility requirements for collateral which banks provide as they borrow from the Eurosystem. This facilitates the banks’ access to the expanded refinancing operations.
In addition, the Eurosystem has expanded its purchase programmes to include the Pandemic Emergency Purchase Programme (PEPP). This temporary programme enables the Eurosystem to purchase additional debt instruments issued by governments, banks and firms in a flexible way.
The actions taken by the Eurosystem and central banks elsewhere in the world have helped to stabilise financial markets. The initial stress seen on the bond market and specific money market segments has largely dissipated, and interest rates have resumed a downward path towards pre-crisis levels. In addition, the expanded credit facilities support banks in maintaining their levels of corporate lending, as evidenced by the record lending levels seen in the euro area over the last months.
Monetary policy results in unprecedented balance sheet growth in the Eurosystem
The recent programmes follow after the unconventional monetary policy measures taken in recent years to steer inflation to a level close to two percent. As a result, the Eurosystem’s aggregate balance sheet has grown substantially over a short period of time, now standing at well above EUR 6,000 billion (see Figure 1), equalling more than half of the euro area GDP. As DNB is a member of the Eurosystem, its balance sheet has also expanded. Total exposures have reached just over one-third of Dutch GDP. Together with the other central banks in the Eurosystem, DNB implements the ECB’s policy, thereby ensuring that the operations conducted also benefit Dutch parties.
Rapid central bank balance sheet growth is not without precedent
While the Eurosystem’s rapid balance sheet growth is not a unique event, it is striking from a historical perspective. Central banks’ balance sheets are also rapidly increasing in other countries, including the United States, Japan and the United Kingdom, to enable banks to keep financing the economy. Previous periods in which this happened globally involved major crises, such as deep economic recessions and wars (see Figure 2).
Figure 1 Eurosystem balance sheet