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As monetary policy continues to tighten and excess liquidity is gradually drained from the banking system, the European Central Bank (ECB) is confronted with a decision on which liquidity provision framework the Eurosystem should adopt going forward. Three papers were prepared by the ECON Committee’s Monetary Expert Panel, discussing the relative advantages and disadvantages of the ample reserves/floor system versus the scarce reserves/corridor system. This document was provided by the Economic ...

This paper analyses the operational frameworks adopted by the ECB and the consequences of a shift from the floor to the corridor system. The concept of excess liquidity in the euro area is examined, alongside discussions on market liquidity and funding liquidity. The paper emphasises the need to evaluate the implications for monetary policy effectiveness and financial stability of the different frameworks, shedding light on the role of liquidity in maintaining well-functioning financial markets. ...

This study, commissioned by the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs at the request of the AFCO Committee, examines the fiscal responses of the EU to the Covid-19 pandemic and the war in Ukraine. It claims that the law & policy tools developed to address these crises have led to the establishment, and consolidation, of an EU fiscal capacity – contributing to overcoming the original imbalance of the EU’s Economic & Monetary Union. Nevertheless, the ...

The rise of policy rates in the euro area has led to a tightening of financing conditions raising concerns for financial stability. The risk of financial crisis should be neither ignored nor overstated. The euro area is not facing conditions for which there would be the highest probability of a crisis. The risk faced by banks depends on the share of adjustable-rate mortgages. At this stage, net interest margin of banks and profitability have slightly improved.

Real challenges to the ECB

Analiza 25-05-2023

As it brings inflation down, the ECB faces lingering real-side disturbances inherited from the pandemic and the invasion of Ukraine. Its actions sometimes even deepen these disturbances. The paper argues that it simply cannot deal with them, and should not try to.

Even if QT is as inefficient as QE at affecting inflation, now is the time to cut the size of central banks’ balance sheets. The stabilising effects of large balance sheets are eroded as the financial markets adapt to excess reserves. If QT proves to be financially destabilising, it can be temporarily interrupted, possibly even reversed. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the ...

The surge in inflation rates experienced by the euro area since the beginning of 2021 is rooted in supply shocks that have led to bottlenecks and an energy crisis. This paper shows that the shifts of inflation expectations into prices could cause some persistence in the excessive inflation process. In this last respect, the flatness of the Phillips curve implies that the unemployment-inflation sacrifice ratio is high; hence, there are substantial costs of bringing inflation down through a contraction ...

After the financial crisis, the supervisory framework of the euro area banking sector has been seriously scaled up. This briefing argues, however, that there still is a watchdog role for journalists, as banking supervisors cannot single out banks that take excessive risks or fall short of other obligations. Based on a survey, we find that more than half of the significant banks in the euro area organise press conferences, which could provide a suitable forum for dedicated journalist to ask challenging ...

This note is prepared in view of an ordinary public hearing with the Chair of the Single Resolution Board (SRB), Elke König, which will take place on 13 July 2022. During the hearing, the Chair of the SRB will notably address the institution’s 2021 annual report, published on 27 June 2022. This briefing also addresses the Sberbank resolution case, developments on MREL build-up and in relation to the Banking Union, and it presents a summary of some recent institutional policy papers relevant for ...

On 26 July 2012, then ECB President Mario Draghi gave the so-called “whatever it takes” speech, today widely considered as the turnaround point in the European sovereign debt crisis. Shortly after, the European Central Bank (ECB) announced the details of its outright monetary transactions programme (OMT) tool. The speech, together with the OMT announcement, were enough to remove re-denomination risk from sovereign bond markets. OMT was never actually used. 10 years after, in a context of record-high ...