Quarterly Bulletin Q3 2013

86
Analysis of Recent Monetary Operations &
Quarterly Bulletin 03 / July 13
Financial Market Developments
nor funds placed on the deposit facility were
remunerated, leading to counterparties being
indifferent as to where they placed excess
liquidity. 8
The major turning point in the year was ECB
President Draghi’s comments on 26 July
2012, which resulted in a strong reversal of
risk sentiment across all market segments on
rising expectations of an imminent policy action
from the European authorities. In the sovereign
bond market, ‘peripheral’ government bond
yields fell following the positive sentiment while
the ‘core’ market reversed some of its gains.
Sentiment was further improved following
the announcement of the OMT programme
(August 2012) and subsequently as the details
of the programme were outlined (September
2012). The OMT was received very positively
by markets with focus on the fact that there
was: 1) no stated quantitative limit on the
size of the programme and; 2) the same (pari
passu) creditor status for the Eurosystem as
for other investors.
Market sentiment remained generally positive
for the remainder of 2012, with a rise in risk
aversion towards the end of the year amid
uncertainty over an agreement on the US
fiscal cliff. In early 2013, sentiment continued
to remain broadly positive with a larger than
expected repayment in the first ERO from
the first 3-year LTRO taken as a sign of an
improvement in the financial health of European
banks. Banks have continued to repay at
subsequent EROs and on 31 May 2013 the
total amount of Eurosystem borrowing had
reduced by over €300bn since the beginning
of the year. However, signs of a possible reemergence
of problems within the Eurozone
as a result of the uncertainty over the Cypriot
bailout programme, together with a number of
weak economic sentiment data releases and
low inflation expectations resulted in the ECB
reducing its main policy rate to a record low of
0.50% at its May meeting. 9
In Section 1 of this paper, we examine the
main changes to the ECB’s operational
framework over 2012 and in the first five
months of 2013. Section 2 discusses money
market developments over the same period,
while Section 3 looks at overall trends in
Eurosystem lending and the use of the ECB’s
standing facilities. In Section 4 we look at
developments in Ireland with regard to ELA
provision and Eurosystem lending as well as
the Sovereign’s return to debt markets. Section
5 examines movements in TARGET2 balances
over 2012 and Section 6 describes the focus
of financial markets in mid-2013.
1. ECB’s Operational
Framework/Non-Standard
Policy Decisions
As the financial crisis continued into 2012, with
liquidity shortages among financial institutions
becoming more acute, the ECB and other
global central banks undertook a number of
non-standard measures to encourage lending
to the real economy and restore an appropriate
monetary policy transmission mechanism to
certain markets. This section summarises
some of the main non-standard measures
introduced by the Eurosystem throughout
2012 and during the period up to 31 May
2013.
On 9 February 2012, the Governing Council
of the ECB approved, for seven national central
banks (NCBs), including the Central Bank
of Ireland (CBI), measures for the temporary
acceptance of additional credit claims as
collateral in Eurosystem credit operations.
This development followed the decision of
the Governing Council of 8 December 2011
to increase collateral availability by allowing
Eurosystem NCBs, as a temporary solution, to
accept additional performing credit claims as
collateral.
On 20 June 2012, the Governing Council
of the ECB decided on additional measures
to improve the access of the banking sector
to Eurosystem operations in order to further
support the provision of credit to households
and non-financial corporations. The Governing
Council reduced the rating threshold and
amended the eligibility requirements for
8 Please refer to Annex 1 for a full glossary of terms.
9 The Deposit Facility Rate remained at 0.0% while the Marginal Lending Facility rate reduced to 1.00%.