The Board of Governors of the European Central Bank (ECB) has adopted measures to support the strengthening of bank lending activity and money market liquidity in the euro area. the Board of the ECB decided to conduct two longer term refinancing operations (LTRO) with a maturity of 36-months with the option of prepayment for banks after a year.
How to measure the intensity of the current financial and economic crisis? Regular monitoring of a number of economic and financial indicators helps answering this question and better understanding the materialization of panic behavior and portfolio reallocations in the (...)
Both refinancing operations in the longer term will be carried out through a fixed rate tender procedure. The rate of these operations will be determined by calculating the average rate on main refinancing operations carried out till the maturity of the 36-months refinancing operations. Interest will be paid at maturity. After one year, counterparties have the option to repay a portion of monies that were granted, any day which coincides with the date of settlement of a main refinancing operation. Counterparties must inform their respective central bank the amount they wish to repay, with a one week notice.
The first 36-months refinancing operation will be held December 21, 2011 and the second will be held February 29, 2012.
According to Mory Doré, the behavior of the ECB and the weight of LTRO in relation to the MRO (main refinancing operations) are indicators to measure the intensity of the liquidity crisis.. "Since March 2008, the bulk of liquidity allocated each month to European banks during the ECB tender procedures has averaged around 565 billion Euros. With a very abnormal distribution as 152 billion are in the normal one week refinancing operations (MRO) and 413 billion are in extraordinary repurchase agreements (repo) operations lengths of 1 to 12 months (LTRO). Thus a MRO / LTRO distribution of about 27% -73%, whereas historically the period 1999-2007 for normal functioning of the money market in the euro zone, the distribution was approximately 90% -10% " said Mory Doré. Conducting 36-months refinancing operations therefore seems to indicate that liquidity tensions have continued to worsen for several months, forcing the ECB to intervene and adopt exceptional measures.
To facilitate collateralized lending, the central bank decided to lower the threshold rating for certain mortgage-backed securities as collateral and allow national central banks to accept temporarily as collateral, bank loans that meet specific eligibility criteria.
The ECB also decided to reduce the reserve ratio to 1%, which is currently 2%, as of January 18, 2012, the beginning of the incorporation of reserves. The amount of bank reserves with the ECB is currently 206 billion Euros.
To facilitate collateralized lending, the central bank decided to lower the threshold rating for certain mortgage-backed securities as collateral and allow central banks to accept temporarily as collateral, bank loans that meet specific eligibility criteria. These two measures will take effect as soon as the relevant legal acts are published.
