ANNUAL REPORT 2008 - Polymer Bank Notes of the World

MINIMUM RESERVE SYSTEMCredit institutions in the euro area are requiredto hold minimum reserves on current accountswith the Eurosystem. As has been the case since1999, the minimum reserve requirements wereequal to 2% of credit institutions’ reserve base in2008 and amounted to €210.8 billion on average.It is the growth in the reserve base, which isdetermined by certain short-term liabilitieson credit institutions’ balance sheets, whichexplains the above-mentioned 12.5% increasein the total amount of reserve requirementsduring 2008. Since for any maintenance periodthe Eurosystem remunerates reserve holdingsat a rate which is the average of the marginalrates of the MROs (if conducted as variable ratetenders) or at the fixed MRO rate (in the caseof fixed rate tenders), the minimum reservesystem does not impose significant costs onthe banking sector. At the same time, it fulfilstwo important functions in the operationalframework for monetary policy implementation.First, it stabilises short-term money market rates,because the reserve requirements have to befulfilled only on average over the maintenanceperiod, allowing credit institutions to smoothout temporary and unexpected liquidity inflowsand outflows. Second, it enlarges the liquiditydeficit of the banking system, i.e. banks’ overallneed for refinancing from the Eurosystem.OPEN MARKET OPERATIONSThe Eurosystem uses MROs, LTROs andfine-tuning operations to manage the liquiditysituation in the money market. All liquidityprovidingoperations have to be fullycollateralised. MROs are regular operationswith a weekly frequency and normally havea maturity of one week. They are the maininstrument for signalling the ECB’s monetarypolicy stance.Until 8 October 2008 MROs were conducted asvariable rate tenders with a minimum bid rate, andfrom 15 October as fixed rate tenders in whichall bids were satisfied. The number of eligiblecounterparties increased during 2008 from 1,693to 2,099. Most of this increase took place duringthe months of October and November, whensome banks decided to apply for eligibility owingto borrowing constraints in the money market.On average, 443 counterparties participated inMROs in 2008, 31% more than in 2007 (when338 counterparties participated on average).This increase was also related to the intensifiedpressure in the money market, which meant thatmany counterparties had to fulfil their liquidityneeds by borrowing from the ECB instead ofthe market. The number of bidders in the MROsincreased further when the ECB switched to fixedrate tenders with full allotment in October, froman average of 354 in the variable rate tenders to747 in the fixed rate tenders.Up until 8 October the Eurosystem allotted€175 billion on average in the variable ratetender MROs. The allotted amount variedconsiderably during this period owing tothe frontloading policy, which resulted in adeclining pattern of allotment amounts in thecourse of each maintenance period, and to theincreased liquidity provision through LTROs.When fixed rate tenders with full allotmentwere introduced for MROs on 15 October 2008,allotment amounts increased significantly, to€291 billion on average. By the end of 2008 theliquidity provided in MROs represented 28% ofthe total refinancing volume, considerably lessthan in previous years, when it amounted toaround 65-75%.LTROs are monthly liquidity-providingoperations with a three-month maturity. Inaddition to these operations, a number offurther supplementary LTROs were introducedgradually during 2008. By the end of the year,two supplementary LTROs were conductedduring each maintenance period, one with athree-month and one with a six-month maturity,as well as one special-term refinancing operationwith a maturity equal to the length of themaintenance period. Until mid-October LTROsand supplementary LTROs were conductedas pure variable rate tenders (i.e. without aminimum bid rate). The allotment amount inthe LTROs and three-month supplementaryLTROs during this period was €50 billion(with the exception of two supplementaryECBAnnual Report2008105