Business cycle

Speech by Luis de Guindos, Vice-President of the ECB, at the High-level conference on “Strengthening the EU’s bank crisis management and deposit insurance framework: for a more resilient and efficient banking union” organised by the European Commission

• The global financial crisis and sovereign debt crisis highlighted the need to make faster progress towards completing EMU.
• The implementation of these two pillars represents a milestone in European integration and a major success for financial stability.
• But in terms of completing the banking union we are not there yet.
• First, the final pillar: the European Deposit Insurance Scheme (EDIS).
• Second, in the field of crisis management, the tools for dealing with the failure of smaller and deposit-funded banks.
• And third, the role of macroprudential policy and how it can help us deal with shocks to the financial system.
• This is problematic as the level of confidence in the safety of bank deposits may differ across Member States.
• So long as deposit insurance remains at the national level, the link between a bank and its home sovereign persists.
• But we have not yet seen sufficient political will to implement this third pillar of the banking union.
• These differences create an uneven playing field for bank customers and can prevent failing banks from exiting the market smoothly.

• The Prepackaged Plan provides for a debt-for-equity exchange that will eliminate over $250 million of funded debt obligations from the Companys balance sheet.
• Implementation of the Prepackaged Plan will strengthen Sundances financial structure, allowing it to focus on core competencies without the burden of servicing significant debt levels.
• As a result, we are taking decisive action to address these challenges and deleverage our balance sheet to best position our business for sustained future success.
• These forward-looking statements are based on managements current expectations and beliefs concerning future developments and their potential effect on Sundance.

Panel contribution by Luis de Guindos, Vice-President of the ECB, at the Banque de France / Sciences Po Financial Stability Review Conference 2021 “Is macroprudential policy resilient to the pandemic?”

1 March 2021

Introduction

• About one year ago, the euro area was hit by a major unexpected shock: the COVID-19 pandemic.
• While this health and economic crisis has had, and continues to have, a severe impact on European citizens and businesses, the euro area banking sector has so far weathered the crisis well.
• Rather than being part of the problem, it has been part of the solution.
• The banking sector has managed to support the economy through continued lending, including to the sectors most affected by the lockdown measures.
• Compared to past crisis episodes, there are two main reasons why banks have played a different role in this crisis.
• First, in terms of capital and liquidity, the euro area banking sector was much better prepared than it was before the great financial crisis.

Macroprudential space

• When the pandemic struck in early 2020, macroprudential authorities in the euro area had little room for manoeuvre to release macroprudential capital buffers.
• There seems to be a growing consensus on the need to reassess the current balance between structural and cyclical buffers and to create more macroprudential space that could be used in a system-wide crisis if needed.
• I strongly welcome this development and encourage further work and discussions on this important topic, including on specific ways to create macroprudential space.
• First, the creation of macroprudential space should be capital-neutral.
• Second, the additional macroprudential space created in this way needs to have strong governance in order to ensure that capital buffers are released in a consistent and predictable way across countries when facing severe, system-wide economic stress.
• Third, considerations to create macroprudential space should focus on options that ensure continued compliance with applicable international standards set by the Basel Committee.
• The capital conservation buffer would be a natural candidate for creating macroprudential space if it was made releasable in a context where these principles were adhered to.

Complementarities between macroprudential and monetary policy

• The second challenge relates to complementarities between macroprudential and monetary policy.
• [2] For instance, during phases of risk build-up, effective macroprudential policy can unburden monetary policy with respect to financial stability concerns.
• Similarly, during phases of risk materialisation, releasing macroprudential policy buffers can support monetary policy via the impact on banks credit supply.
• Exploiting the complementarities between monetary and macroprudential policy requires a structured approach to the interaction between the two policy areas.
• Under the current institutional architecture of the monetary and banking union, monetary policy and microprudential policy decisions for significant institutions are taken centrally in the euro area.
• A coordinated macroprudential policy response across the euro area is vital to strengthen the impact of policy actions and to support monetary policy, for instance through the release of macroprudential buffers in a system-wide crisis.

Conclusions

Speech by Philip R. Lane, Member of the Executive Board of the ECB, at Comissão do Mercado de Valores Mobiliários

25 February 2021

Introduction

• In my remarks today, I will set out some considerations for thinking about favourable financing conditions as the compass guiding monetary policy.
• First, I will explain the logic of employing the favourability of financing conditions as the compass for monetary policy.
• In assessing financing conditions, it is desirable to adopt a holistic approach, based on a multi-faceted set of indicators for both bank-based and market-based financing conditions.
• Accordingly, in the following sections, I next turn to the analysis of bank-based funding conditions, which is followed by the analysis of market-based financing conditions.

Favourable financing conditions as the compass

• The phrase favourable financing conditions intentionally puts the spotlight on a pivotal section of the transmission mechanism that links the basic monetary policy instruments controlled by central banks (policy rates, asset purchases and refinancing operations) to the ultimate objective of delivering the medium-term inflation aim.
• Under pandemic conditions, two threats to the efficiency of monetary policy can be clearly identified.
• First, frictions in financial intermediation may disrupt the transmission of monetary policy impulses to the financing conditions for key economic actors (households, firms and governments).
• In this context, a focus on preserving favourable financing conditions as the compass guiding monetary policy addresses both concerns.
• First, it emphasises that the central bank is committed to recalibrating its underlying policy instruments if it detects any threat to the favourability of financing conditions.
• Second, clear communication that the financing conditions directly relevant to households, firms and governments will remain favourable during the pandemic period reduces uncertainty and bolsters confidence, thereby encouraging spending and investment, and ultimately underpinning the economic recovery and inflation.

Chart 1

Realised and projected HICP inflation (year-on-year percentage changes, quarterly averages)
• In turn, vigorous inflation dynamics are only likely if the overall economic recovery is robust.
• The preservation of favourable financing conditions for an extended period of time helps to support inflation developments through multiple channels.
• [3] First, the commitment to preserving favourable financing conditions reduces financing uncertainty for banks, corporates, households and governments alike.
• Keeping favourable financing conditions in this environment could even accelerate the dynamics of the recovery, since better economic prospects combined with attractive financing conditions can fast-track consumption and investment.
• [4] In particular, in December, the Governing Council pledged that purchases under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period.
• Overall, we need to assess indicators that provide information on the whole gamut of transmission from upstream stages to downstream effects.
• Other financial indicators also feed into the staff macroeconomic projections and are incorporated into the Governing Councils regular assessments of the appropriate monetary stance.

Bank-based financing conditions

• [5] The pandemic and the measures to contain the spread of the virus have severely disrupted economic activity and curtailed business revenues.
• The avoidance of adverse feedback loops between the real economy and financial markets is a central task for policy makers.
• In turn, banks have been able and willing to meet the strong demand for liquidity over the course of the pandemic.
• The euro area bank lending survey (BLS) confirms that high loan demand of firms was accommodated by banks, which met the demand for bridge financing despite the rapid worsening of economic prospects in the second quarter of 2020.
• Monetary, supervisory and fiscal policies have been central to supporting bank lending conditions since the onset of the pandemic in terms of volumes and lending rates, which are around historically low levels for both firms and households.
• [6] The favourable impact of the TLTRO III on bank lending conditions and lending volumes has been signalled clearly by banks in the BLS.

Chart 2

Changes in credit standards and demand for loans to euro area firms in 2020 (net percentages of banks reporting an easing (+)/tightening (-) of credit standards and an increase (+)/decrease (-) in loan demand; net loan flows in EUR billions)
• In the autumn, however, signals from the BLS pointed to a broad-based tightening in credit conditions, even though bank lending rates have remained at historically favourable levels.
• Banks attribute the tightening of bank lending conditions to the intensification of risks to creditworthiness and the prospect of possible loan losses in the future, especially as the pandemic has lasted longer than originally expected.
• While Chart 3 shows that the net tightening of credit standards on loans to firms remains moderate compared with the global financial and sovereign debt crises, it signals potential risks to future loan growth.

Chart 3

BLS bank lending conditions and loan growth to firms (left-hand scale: net percentages of banks reporting an easing (+)/tightening (-) of credit standards and an increase (+)/decrease (-) in loan demand; right-hand scale: percentages)
• It follows that the evolution of corporate vulnerabilities and their possible ramifications for the bank-intermediated financing conditions facing the real economy should be closely monitored.
• This adverse interaction would be reinforced if household spending were to weaken and thereby were to further dampen the prospects for firms.
• These upstream-downstream inter-connections underline the critical importance of market-based financing conditions for the entire economy, not just for those entities that directly raise funding in the capital markets.

Market-based financing conditions

• Even households and small businesses which finance themselves via banks rather than in the market incur changes in their cost of funding through the impact of market-based financing conditions on bank-based financing conditions.
• In addition, market-based financing conditions influence non-bank intermediation, since the costs and benefits to participants in this sector vary with shifts in returns on investment.
• [8] Ensuring that the risk-free yield curve remains at highly accommodative levels is a necessary (but not sufficient) condition for ensuring that overall financing conditions are supportive enough to counter the negative pandemic shock to the projected inflation path.
• As such, sovereign yields are a key element in determining general financing conditions in all sectors and jurisdictions across the euro area.

Chart 4

Bank and sovereign bond yields (daily; percentages per annum; x-axis: sovereign yields; y-axis: bank bond yields)

Chart 5

Corporate and sovereign bond yields (daily; percentages per annum; x-axis: sovereign yields; y-axis: corporate bond yields)
• In one direction, shifts in the OIS yield curve and the GDP-weighted sovereign yield curve are early indicators of changes in the downstream set of indicators.
• In the other direction, these yield curve indicators are responsive to re-calibrations of our primary monetary policy instruments.
• Our monetary policy measures can contribute to preserving the OIS yield curve and the GDP-weighted sovereign yield curve at favourable levels.
• Following a temporary disconnect at the onset of the pandemic in the spring of 2020, our monetary policy actions successfully restored a close co-movement between the OIS curve and the GDP-weighted sovereign yield curve, most notably through the market stabilisation function of the PEPP (Chart 6).

Chart 6

10-year GDP-weighted sovereign yield and 10-year nominal OIS rate in the euro area (percentages per annum)
• Chart 7 shows that there was a considerable lowering of the middle and long segments of these yields curves over the course of 2020.
• By mid-December, these curves were relatively flat compared to the short-term policy rate (the deposit facility rate).
• In the initial weeks of 2021, there has been a steepening of these curves.

Chart 7

Euro area risk-free OIS and GDP-weighted sovereign yield curves and the ECB’s deposit facility rate (y-axis: percentages per annum; x-axis: maturity in years)
• This assessment will vary over time, taking into account revisions to the economic and inflation outlook.
• The integrated nature of global financial markets also means that there are clear spillovers across different currency areas in terms of the underlying shocks driving bond yields.
• Such financial spillovers are especially consequential if economies are at different stages of the economic cycle.
• For any given level of nominal interest rates, a generalised increase in expected inflation provides a boost to inflation dynamics by reducing economy-wide real rates.
• Tracking the full set of inflation expectations across the range of economic actors (financial market participants, firms, households) is, of course, a demanding exercise.

Conclusions

• In this environment, ample monetary stimulus remains essential to preserve favourable financing conditions over the pandemic period for all sectors of the economy.
• By helping to reduce uncertainty and bolster confidence, this will encourage consumer spending and business investment, underpinning economic activity and safeguarding medium-term price stability.
• In particular, the purchases made under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period.
• Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields.