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The EMU quest for integration: What does the ECB’s collateral data tell us?

Macchiarelli, C. & Monti, M., (2018), «The EMU quest for integration: What does the ECB’s collateral data tell us?», LSE EUROPP, Ιούλιος

Quantitative easing (QE) has been the monetary policy innovation tool of the 21st century. With the global economic recovery now seemingly robust, the challenge facing policymakers is how to reverse this exceptional monetary policy stimulus. The Fed has already started, whereas the ECB recently announced that its quantitative easing programme will stop at the end of 2018 given the eurozone’s recovery in growth and inflation is expected to continue. The way this decision is managed will be crucial for avoiding potential market disruptions in the eurozone and, in particular, in the periphery via a widening of spreads. Since the collapse of Lehman Brothers, central banks have bought 14.2 trillion dollars of financial assets overall, mostly sovereign bonds. This has been the biggest and fastest accumulation of assets since the beginning of the financial crisis, but now that a post-QE era has started, greater uncertainty is mounting. Generally speaking, the end of QE constitutes a tightening of financial conditions. In a recent note to the European Parliament, we underlined the crucial role played by the ECB’s collateral policy in the financial system as a mean of increasing the flow of money from where it is currently being held to where it is most needed. In this way, the collateral acts like a lubrication for the financial system. The ECB’s collateral frameworks played an important role in defining what was considered a safe asset before the crisis. The 2008 financial crisis and the adoption by the ECB of non-standard measures led to a revision of the collateral framework, with a widening of the balance sheet of the Eurosystem, reflecting the growing amount of assets accepted as collateral. At the same time, some haircuts were increased to ensure the ECB against the greater liquidity risk and greater price volatility of these newly admitted debt securities, suggesting that the riskiness of the collateral underlying the ECB’s liquidity operations did not necessarily increase much during those phases.

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