ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Box 10MONETARY POLICY OPERATIONS DURING THE RECENT FINANCIAL MARKET VOLATILITYThe financial market turmoil affected the conduct of monetary policy operations throughout2008. This box describes the monetary policy operations conducted by the ECB in relation tothe turmoil. It focuses on liquidity management measures, with regard to both euro operationsand operations in foreign currencies, and describes how the collateral framework supported theimplementation of monetary policy during this period.Two phases of liquidity management can be identified in 2008. The first was the period fromJanuary to September, when the ECB broadly continued with the measures it had adoptedduring the second half of 2007. The second phase began with the failure of Lehman Brothers inSeptember, which led to intensified money market tensions and triggered a new wave of liquiditymanagement measures.Liquidity management from January to September 2008The ECB’s measures to address the tensions in the money market in the period from January toSeptember 2008 can be grouped under three headings:1 Provision of liquidity earlier in the maintenance periodDuring this period the ECB increased the supply of liquidity at the beginning of themaintenance period and reduced it towards the end. This “frontloading” of liquidity enabledcounterparties to fulfil their reserve requirements somewhat earlier in the maintenance period,but did not change the average supply of liquidity over the entire maintenance period. Creditinstitutions appeared to develop a preference for the early fulfilment of reserve requirementsin an environment of high uncertainty and decreasing turnover, especially in longer-termsegments of the money market. On some occasions, the ECB conducted fine-tuning operationson days within a maintenance period with the aim of steering short-term interest rates close tothe policy rate.2 Supplementary longer-term refinancing operationsIn this period the outstanding amount of refinancing provided via longer-term operations,which had increased from roughly 30% before the start of the turmoil in July 2007 to around60% in January 2008, was kept broadly unchanged. On 7 February 2008 the GoverningCouncil decided 1 to renew the two additional three-month operations that had been introducedin 2007 with the aim of supporting the normalisation of the money market (initially for anamount of €60 billion and then for the reduced amount of €50 billion). At the same time,the average maturity of outstanding refinancing was further increased with the introductionof supplementary LTROs with maturities of three and six months. On 28 March 2008 theGoverning Council decided to introduce additional three-month operations of €50 billion aswell as six-month operations. The first such six-month operations were settled on 3 April and1 The full list of statements communicated by the ECB can be found at http://www.ecb.europa.eu/mopo/implement/omo/html/communication.en.html.ECBAnnual Report200899