Lessons from an unusual crisis - Isabel Schnabel Member of the ECB Executive Board - European Central Bank
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Lessons from an
unusual crisis
FRBNY Conference on “Implications
of Federal Reserve Actions in
Response to the COVID-19
Pandemic”, 1 October 2021
Isabel Schnabel
Member of the ECB Executive Board
www.ecb.europa.eu ©Subdued inflation outlook in the euro area implied
highly accommodative monetary policy already before the pandemic
Realised and projected path of inflation Central bank policy rates
in the euro area (annual percentage change) (percent)
HICP inflation Switzerland United States
Pre-pandemic projection (Dec. 2019) United Kingdom Euro area (Main Refinancing Operation)
Latest projection (Sep. 2021) Japan Euro area (Deposit Facility Rate)
3.5 3.5 8
COVID-19 COVID-19
3.0 outbreak 3.0 7 outbreak
6
2.5 2.5
5
2.0 2.0
4
1.5 1.5
3
1.0 1.0
2
0.5 0.5
1
0.0 0.0 0
-0.5 -0.5 -1
-1.0 -1.0 -2
2014 2016 2018 2020 2022 2024 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Sources: ECB calculations. Source: Bank for International Settlements (BIS).
Latest observation: Q2 2021. Latest observation: August 2021.
2 www.ecb.europa.eu ©Eurosystem balance sheet expanded markedly before the pandemic
with sharp acceleration due to pandemic crisis measures
Evolution of the Eurosystem’s monetary policy assets (EUR billion)
MRO LTRO TLTRO Public APP (PSPP,
(PSPP),SMP)
SMP Private APP (CSPP, CBPP3, ABSPP) PEPP
7000 7000
COVID-19
outbreak
6000 6000
5000 5000
4000 4000
3000 3000
2000 2000
1000 1000
0 0
2007 2009 2011 2013 2015 2017 2019 2021
Source: ECB, ECB calculations.
Note: The chart shows the consolidated monetary policy assets held by the Eurosystem. It excludes non-monetary policy assets such as gold and gold receivables, claims on non-euro area residents and non-
monetary policy securities held under the “Agreement on Net financial Assets” (ANFA).
Latest observation: 29 September 2021.
3 www.ecb.europa.eu ©Bank-based transmission remains highly relevant in the euro area
in spite of the rise of non-banks and bond financing
Financial asset holdings of MFIs and non-MFIs Share of corporate debt securities in debt financing
in the euro area (EUR trillion) (percentage)
Total Euro area
Monetary financial institutions (MFIs)
United States
Non-monetary financial institutions (Non-MFIs)
90 70%
COVID-19 COVID-19
Thousands
80 outbreak outbreak
60%
70
50%
60
40%
50
40 30%
30
20%
20
10%
10
0 0%
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Sources: ECB and US Federal Reserve.
Source: Euro area accounts. Note: The chart shows the volume of debt securities relative to the sum of bank loans and debt
Note: Non-MFIs include insurance companies and pension funds (ICPFs), investment funds (IFs), and securities. Data cover the non-financial corporat (NFC) sector for the euro area and the non-
other financial intermediaries (OFIs). MFIs exclude the Eurosystem. Calculations based on market financial business sector for the US series. Data on debt securities and bank loans are outstanding
values. amounts (not seasonally adjusted).
Latest observation: Q1 2021. Latest observation: Q1 2021.
4 www.ecb.europa.eu ©High take-up of TLTROs and sharp rise in bank lending to firms
Take-up of ECB liquidity-providing operations Bank loan growth and lending rate for firms
(EUR billion) (annual percentage changes and percentages per annum)
TLTRO II TLTRO III Additional LTRO PELTRO Loans to euro area firms (lhs)
2400 Composite bank lending rate for firms (rhs)
2200 8 1.8
COVID-19
2000 outbreak
7 1.7
1800
6 1.6
1600
1400 5 1.5
1200
Current take-up: 4 1.4
1000 €2,229 billion
800 3 1.3
600 2 1.2
400
1 1.1
200
0 0 1
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 2018 2019 2020 2021
Source: ECB.
Notes: Loans to non-financial corporations (NFCs) are adjusted for loan sales, securitisation and for
Source: ECB. notional cash pooling. Composite bank lending rates are calculated by aggregating short and long-
Note: TLTRO III refers to the sum of TLTRO III.1-9. term rates using a 24-month moving average of new business volumes.
Latest observation: 1 October 2021. Latest observation: August 2021.
5 www.ecb.europa.eu ©TLTROs safeguarded bank-based transmission during the pandemic
Evolution of eligible loans for TLTRO III
participants and non-participants Evolution of expected use of TLTRO III funds
(notional stock, February 2020 = 100) (share of respondents weighted by TLTRO III amounts)
Participants in TLTRO III EUR 2080 bn
Substitution
Non-participants in TLTRO III EUR 1699 bn
of market funding
110 110
COVID-19
outbreak
105 105 Granting loans
to the NFPS
EUR 101 bn EUR 605 bn
Expected use of funds
100 100 December 2019
Other forms of
asset expansion
95 95
Expected use of funds
March 2020
Mixed use
90 90
Expected use of funds
September 2020
85 85 Expected use of funds
Dec-17 May-18 Oct-18 Mar-19 Aug-19 Jan-20 Jun-20 Nov-20 Apr-21 Source: ECB, euro area bank lending survey (BLS) and ECB calculations. March 2021
Notes: Other forms of asset expansion include government securities, cash holdings, financing other
Sources: ECB and ECB calculations. financial entities, and others. Shaded areas report take-up of banks that change their expected use of
Notes: The chart displays the evolution of eligible loans for banks participating (blue line) and banks funds between survey waves. NFPS refers to non-financial private sector. For details, see Barbiero et
not participating (yellow line) in TLTRO III until May 2021. For details, see Barbiero et al. (2021), al. (2021), “TLTRO III and bank lending conditions”, Economic Bulletin, Issue 6, ECB.
“TLTRO III and bank lending conditions”, Economic Bulletin, Issue 6, ECB. Latest observation: Q1 2021 (April 2021 BLS).
6 www.ecb.europa.eu ©PEPP flexibility restored market functioning and countered risks of fragmentation
Net asset purchases under PEPP by asset class Capital key deviations under PEPP
(EUR billion) (percentage points)
Public
PublicSector
sector Commercial
CommercialPaper
paper Other
OtherPrivate
privateSector
sector DE ES FR IT other
Otherjurisdictions
jurisdictions
250 8
6
200
4
150
2
100 0
-2
50
-4
0
-6
-50 -8
Mar-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Mar-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21
May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21
Source: ECB website, ECB calculations.
Notes: Capital key deviations for public sector purchases calculated in bi-monthly stock terms. DE –
Source: ECB website.
Germany, ES – Spain, FR – France, IT – Italy.
Latest observation: July 2021.
Latest observation: July 2021.
7 www.ecb.europa.eu ©Spread of euro area GDP-weighted sovereign yields over risk-free rates
declined after announcement of PEPP and EU recovery fund
Euro area GDP-weighted sovereign bond yields and OIS rates
(percent)
EA10y OIS 10y
1.0 1.0
Announcement of PEPP European Council decides to establish a
joint recovery fund
0.5 0.5
0.0 0.0
-0.5 -0.5
-1.0 -1.0
09/2019 12/2019 03/2020 06/2020 09/2020 12/2020 03/2021 06/2021 09/2021
Sources: Refinitiv, ECB calculations.
Note: OIS refers to overnight index swap.
Last observation: 30 September 2021.
8 www.ecb.europa.eu ©“Flow effect” of asset purchases matters more in stressed market conditions
“Flow effects” on daily bond returns
(impact of a 1 percentage point increase in purchases of “Stock” and “flow effects” on bond yields conditional
security relative to its outstanding amount, in percent) on market liquidity (percentage points)
Coefficient Stock Flow
5 0.05 0.05
Marginal effect on 10y sovereign yield
4
3 0.00 0.00
2
-0.05 -0.05
(p.p.)
1
0
-0.10 -0.10
-1
All Stressed countries, Stressed countries,
countries, non-stressed period stressed -0.15 -0.15
non-stressed period 0.01 0.02 0.03 0.04 0.05
period Bid-ask spread (percentage points)
Source: ECB calculations.
Notes: The impact estimates derive from regressions of daily bond returns of individual central Source: ECB calculations.
government securities on ECB purchases of these securities, scaled by their outstanding amounts, Notes: Estimated marginal effect of stock and flow measures of asset purchases on 10-year bond
and a full set of security- and day-fixed effects. Purchase volumes are instrumented via the blackout yields conditional on market illiquidity, measured by bid-ask spreads based on a non-linear
periods embedded in the PSPP and PEPP design, as detailed in De Santis, R. and Holm‐Hadulla, regression model. “Stock” is defined as the ratio of survey-implied total expected public sector
F. (2020), “Flow Effects of Central Bank Asset Purchases on Sovereign Bond Prices: Evidence from purchases by the expected end of net asset purchases to total expected outstanding public sector
a Natural Experiment”, Journal of Money, Credit and Banking, Vol. 52, No 6, pp. 1467-1491. debt. “Flow” is defined as the ratio of realised net purchases of public sector bonds to realised net
Diamonds are point estimates, whiskers are 95% confidence intervals. issuances per month. Monthly frequency over a sample period from January 2015 until July 2021.
9 www.ecb.europa.eu ©Thank you for your attention!
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