Euro

Introduction

• Despite the difficulties in conducting the survey owing to the spread of the coronavirus (COVID-19) across Europe and the associated disruption in the business activity of many euro area companies, the euro area sample was collected successfully.
• The total euro area sample size was 11,236 enterprises, of which 10,287 (92%) had fewer than 250 employees.
• [1] The report provides evidence on changes in the financial situation of enterprises and documents trends in the need for and availability of external finance.

1 Overview of the results

• The survey results suggest that SMEs perceive there to have been a rapid deterioration in the economic environment, despite generally accommodative financing conditions.
• Consequently, a growing number of them considered the macroeconomic outlook to be an impediment to their access to external finance.
• SMEs responses on the expected availability of external finance are useful in gauging the possible impact of the coronavirus pandemic in the immediate future.
• Table 1 Latest developments in SAFE country results for SMEs (over the preceding six months; net percentages of respondents)

2 Financial situation and main concerns of SMEs in the euro area

2.1 Signs of a deterioration in the financial situation of euro area SMEs

• In the period from October 2019 to March 2020, the financial situation of euro area SMEs remained consistent with expectations of a rapid deterioration in the economic environment, despite generally accommodative financing conditions (see Chart 1).
• For the first time since the beginning of 2014, euro area SMEs signalled, in net terms[2], a decline in turnover (-2%, from 20%).
• Consequently, euro area SMEs reported a sharp deterioration in profits (in net terms -15%, from -1%).
• In the trade sector, a net 19% of euro area SMEs also reported decreasing profits, with the percentages reaching 37% in Italy and 30% in Spain.
• In this survey round, the net percentage of euro area SMEs reporting an increase in interest expenses (1%) remained unchanged, although there was a rise in the percentage of Italian SMEs (14%, from 9%) and Irish SMEs (16%, from 12%).
• Euro area SMEs indicated declining debt-to-total assets ratios (-4%, from -7%), except in Italy where they reported increases in leverage (7%, from 1%) (see Chart 16 in Annex 1).
• Chart 1 Change in turnover and profit of SMEs across euro area countries (over the preceding six months; net percentages of respondents) Q2.


Chart 2 Vulnerable and profitable enterprises in the euro area (percentages of respondents) Q2. Have the following company indicators decreased, remained unchanged or increased over the past six months?

• Box 1 Ad-hoc questions: Pricing practices of euro area SMEs To help understand euro area SMEs pricing practices this survey round introduced two additional questions on important factors affecting price setting and on the expected impact of those factors on SMEs prices over the next 12 months.
• Firms pricing behaviour is of obvious interest for monetary policy, and information about SMEs pricing practices remains relatively scarce compared to that from larger enterprises.
• Overall, the survey results point to fairly common pricing practices of euro area SMEs regardless of their size, country and sectors.
• The prices of competitors and market shares, as well as other input prices are also very important for around 50% of the firms.
• The foreign exchange rate, however, is viewed as not important by more than 40% of euro area firms, irrespective of their size, which may reflect the strong relevance of the Single Market for euro area companies.
• SMEs price-setting practices appear to be quite similar across euro area countries (see Chart B), with the differences arising mostly when the factors are assessed as very or moderately important.
• Among the largest euro area countries for example, demand for own product and labour costs and to a lesser extent expected inflation appear to be more important for SMEs in Germany than for those in other countries.
• [4] Inflationary pressures are expected to remain subdued across the euro area (see Chart C).
• Labour costs and other input costs were expected to be the main sources of upward pressure on SMEs prices.
• [6] By contrast, Italian SMEs reported significantly lower expected increases for those two cost factors (26% and 31% respectively).
• Chart C Expected impact of factors on euro area SMEs pricing (percentages of respondents) QA2: How will each factor affect your selling prices over the next twelve months?

2.2 Main concerns for euro area SMEs

• Availability of skilled labour continues to be the main concern for euro area SMEs, together with the difficulty in finding customers (seeChart 3).
• In this survey round, availability of skilled labour was the main concern for euro area SMEs (24%, down from 28% in the previous round), together with the difficulty in finding customers (21%, from 22%).
• Chart 3 The most important problems faced by euro area SMEs across euro area countries (over the preceding six months; percentages of respondents) Q0.

3 SMEs’ financing needs and availability of external finance

3.1 Demand for external finance continued to vary among euro area SMEs

• In net terms, euro area SMEs reported an increase in demand for bank loans (8%, from -1%; see Chart 4 and Table1, column 2).
• At the same time, euro area SMEs indicated a growing need for credit lines (13%, from 4%; see Table 1, column 4), which was strongest in Greece (25%), followed by Spain (20%).
• Finance from external and internal sources continued to be used mainly for fixed investment (43%, from 42%) and for inventories and working capital (35%, from 34%).
• Euro area SMEs also indicated, on balance, an improvement in the availability of credit lines (4%, from 8%), trade credit (3%, from 9%) and leasing or hire-purchase agreements (12%, from 15%).
• Chart 4 Change in the availability of and need for bank loans for SMEs across euro area countries (over the preceding six months; net percentages of respondents) Q5.
• The SMEs external financing gap, i.e.
• the difference between the change in demand for and the change in the availability of external finance turned positive[8] at the euro area level (2%, from -4%) for the first time since March 2015 (see Chart 5 and Table 1, column 10).
• Chart 5 Change in the external financing gap perceived by SMEs across euro area countries (over the preceding six months; weighted net balances) Q5.
• For each of the following types of external financing, please indicate if your needs increased, remained unchanged or decreased over the past six months.Q9.

4 Factors affecting availability of external finance

4.1 SMEs indicated growing concerns in relation to their financial conditions and macroeconomic factors affecting their access to external finance

• For the first time since September 2014, euro area SMEs reported weakness in their financial situations as a factor impeding access to finance (seeChart 6).
• SMEs considered the deterioration in their turnover and profits as an impediment to obtaining external finance (-18%, from 5%).
• A similar strong negative perception was also seen in terms of the net percentages recorded in March 2013.
• The negative perception was stronger for Italian and Spanish SMEs (both -24%, from 3% and -2% respectively), as well as for Portuguese SMEs (-22%, from 11%).
• The rising macroeconomic uncertainty was reported as having a stronger negative impact on the availability of external finance than in the previous survey round.
• Chart 6 Change in factors affecting the availability of external finance for SMEs across euro area countries (over the preceding six months; net percentages of respondents) Q11.


Chart 7 Change in the general economic outlook affecting the availability of external finance for euro area SMEs across the main sectors (over the preceding six months; net percentages of respondents) Q11. For each of the following factors, would you say that they have improved, remained unchanged or deteriorated over the past six months?

4.2 No significant changes in financing obstacles for SMEs during the period October 2019 to March 2020

• The overall indicator of financing obstacles to SMEs in obtaining bank loans increased slightly to 8%, from 7% (see Chart 8 and the last column of theTable 1).
• This structural indicator is broadly based on the percentage of rejected loan applications and on the percentage of discouraged firms.
• Chart 8 Obstacles to obtaining a bank loan for SMEs across euro area countries (over the preceding six months; percentages of respondents)

4.3 Interest rates decline while other costs of financing continue to increase

• In this survey round, a net percentage of SMEs reported declines in interest rates on bank loans (-10%, from -9%) in the euro area as a whole, although SMEs in Italy (3%) reported higher interest rates and Ireland no changes (0%) (see Chart 9).
• At the same time, 31% (from 29%) of SMEs signalled higher levels of other costs of financing, such as charges, fees and commissions.
• Chart 9 Change in the cost of bank financing for SMEs across euro area countries (over the preceding six months; net percentages of respondents that applied for bank loans) Q10.

5 Expectations regarding access to finance

5.1 SMEs expect a sharp deterioration in access to bank loans

• For the first time since March 2013, SMEs reported, in net terms, a decline in the expected availability of bank loans (-11%, from 4% in the previous round) (see Chart 10).
• The results of the survey show that expectations were falling significantly in the euro area, with the level of deterioration varying across countries.
• French and Spanish SMEs also signalled a deterioration (-9% and -12%, from 8% and -1% respectively), though this is less acute than that recorded in 2012 (-31% of French and -18% of Spanish SMEs).
• For German SMEs, the deterioration in this survey round was -9% (down from 0%), which is much worse than in 2012 (-2%).
• For Spanish SMEs the deterioration was sharper in the construction (-17%), services (-14%) and trade (-11%) sectors, while in France, SMEs in the trade sector were more pessimistic than their euro area counterparts (-12%).
• Chart 11 Change in the actual and expected availability of bank loans for SMEs across sectors (over the preceding six months and over the next six months; net percentages of respondents) Q9.
• For each of the following types of financing, would you say that their availability has improved, remained unchanged or deteriorated for your enterprise over the past six months?Q23.
• Looking ahead, for each of the following types of financing available to your enterprise, please indicate whether you think their availability will improve, deteriorate or remain unchanged over the next six months.

5.2 Availability of credit lines and bank overdrafts is expected to decrease in the future

• SMEs reported, on balance, an expected deterioration in the availability of credit lines/bank overdrafts over the next six months(-11%, from 3%) (see Chart 12).
• Credit lines and bank overdrafts are the short-term instruments that SMEs can easily use to face the associated challenges.
• In Italy, SMEs were more pessimistic about the availability of credit lines (-2%) over the last six months and expect a further deterioration over the next six months (-15%).
• In the case of credit lines, the reported deterioration in future availability has so far been less acute than in the previous crises, but is not far off.
• A deterioration in the expected availability of bank overdrafts was reported across all economic sectors (see Chart 13).
• Chart 13 Change in the actual and expected availability of bank overdrafts for SMEs across sectors (over the preceding six months and over the next six months; net percentages of respondents) Q9.
• For each of the following types of financing, would you say that their availability has improved, remained unchanged or deteriorated for your enterprise over the past six months?Q23.
• Looking ahead, for each of the following types of financing available to your enterprise, please indicate whether you think their availability will improve, deteriorate or remain unchanged over the next six months.

5.3 SMEs also expect a sharp deterioration in the availability of trade credit

• For many SMEs, trade credit is crucial to maintaining the supply chain finance needed in the event that there is a lack of bank credit during the coronavirus pandemic.
• In Italy, the net percentage of SMEs expecting a reduction was much higher (-25%) and this was accompanied by a deterioration in the actual availability of trade credit over the last six months (-3%).
• Back in 2012, availability of trade credit was expected to deteriorate by higher net percentages of SMEs in Spain (-23%) and France (-30%), but a lower net percentage of SMEs in Italy (-9%).
• In Germany at the time, 4% of SMEs expected an increase in the future availability of trade credit.
• Chart 14 Change in the actual and expected availability of trade credit for SMEs across countries (over the preceding six months and over the next six months; net percentages of respondents) Q9.
• Chart 15 Change in the actual and expected availability of trade credit for SMEs across sectors (over the preceding six months and over the next six months; net percentages of respondents) Q9.
• For each of the following types of financing, would you say that their availability has improved, remained unchanged or deteriorated for your enterprise over the past six months?Q23.
• Looking ahead, for each of the following types of financing available to your enterprise, please indicate whether you think their availability will improve, deteriorate or remain unchanged over the next six months.

Annexes

Annex 1 Overview of the survey replies – selected charts

Chart 16 Change in debt-to-total assets ratio and interest expenses of SMEs across euro area countries (over the preceding six months; net percentages of respondents) Q2. Have the following company indicators decreased, remained unchanged or increased over the past six months?
Chart 17 Vulnerable and profitable SMEs across euro area countries (over the preceding six months; percentages of respondents) Q2. Have the following company indicators decreased, remained unchanged or increased over the past six months?
Chart 18 Applications for bank loans by SMEs across euro area countries (over the preceding six months; percentages of respondents) Q7A. Have you applied for the following types of financing in the past six months?
Chart 19 Outcome of applications for bank loans by SMEs across euro area countries (over the preceding six months; percentages of respondents) Q7B. If you applied and tried to negotiate this type of financing over the past six months, what was the outcome?
Chart 20 Change in non-price terms and conditions of bank financing for SMEs across euro area countries (over the preceding six months; net percentages of respondents) Q10. Please indicate whether the following items increased, remained unchanged or decreased in the past six months.

Annex 2Descriptive statistics for the sample of enterprises

Chart 21 Breakdown of enterprises by sector (unweighted percentages)
Chart 22 Breakdown of enterprises by age (unweighted percentages)
Chart 23 Breakdown of enterprises by ownership (unweighted percentages)
Chart 24 Breakdown of enterprises by exports (unweighted percentages)

Annex 3Methodological information on the survey

• This annex presents the main methodological changes introduced in the latest round of the Survey on the Access to Finance of Enterprises (SAFE).
• An overview of how the survey was set up, the general characteristics of the euro area enterprises that participated in the survey and the changes made to the methodology and questionnaire over time is provided in the methodological information on the survey.
• Since September 2014 the survey has been carried out by Panteia b.v., in cooperation with the fieldwork provider GDCC.
• This stems from the review of various components of the survey after ten survey rounds, covering the questionnaire, sample allocation, survey mode and weighting scheme (see Annex 4 of the report on round 11 of the survey).
• Since then, with all the euro area countries participating in the survey, the weighting scheme has been updated once a year (see the section on weighting in the methodological information on the survey).
• In this survey round no major changes were made to the existing questions in the questionnaire.

The year at a glance

• The economic situation and the ECBs policy actions have evolved substantially since that point.
• The ECB will do everything necessary within its mandate to help the euro area through this crisis.
• Euro area economic growth moderated further in 2019, to 1.2% from 1.9% in the previous year.
• Euro area labour markets continued to improve in 2019.
• The unemployment rate declined further to 7.6%, and wage growth remained robust, around its long-run average.
• Headline inflation in the euro area stood at 1.2% on average in 2019, down from 1.8% in 2018.
• The strategy supports the development of a market-led pan-European solution for point-of-interaction payments, to complement the successful Single European Payments Area.
• 2019 brought a renewed focus on engaging with a broader audience than financial markets and experts, and on listening more attentively to peoples concerns.
• Initiatives included the #EUROat20 competition, a new ECB explains video series and a monthly podcast.

The year in figures

1 Euro area economic activity moderated amid muted inflationary pressures

• After peaking in mid-2018, the global economy slowed down considerably in 2019 amid a sharp rise in trade-related uncertainty.
• In this context, euro area economic growth moderated further, to 1.2% from 1.9% in the previous year.
• At the same time, the slowdown was cushioned by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the continued albeit slower growth in global activity.
• Euro area labour markets improved further, while productivity growth decelerated substantially.
• Euro area government bond yields declined significantly, whereas euro area equity prices increased mainly on account of lower discount rates.

1.1 The global economy slowed down considerably

• The global economy slowed down considerably in 2019 and the slowdown was broad-based and synchronised across countries Over the course of 2019 global economic growth declined sharply.
• After peaking in mid-2018, the global economy slowed down considerably and grew at a rate that was well below the historical average and the weakest since the global financial crisis (see Chart1).
• This global slowdown was broad-based and synchronised across countries.
• In China, growth declined to the lowest rate since 1990 and was around its currently estimated potential rate.
• The global economic slowdown was driven by a decline in manufacturing sector output and considerably weaker trade and investment growth.
• By contrast, services sector output growth moderated to a lesser extent, supported by relatively robust consumption growth and a continued improvement in labour markets.
• Trade and investment growth weakened considerably in 2019, driven by a sharp rise in trade-related uncertainty Trade-related uncertainty rose sharply and remained elevated, weakening the global economy.
• Trade tensions between the United States and China escalated, as suggested by a range of different indicators.
• Headline inflation fell, but core inflation remained broadly stable Global inflation remained subdued in 2019, reflecting weak global growth momentum (see Chart3).
• In the OECD area, headline annual consumer price inflation fell from around 3% in the second half of 2018 to 2.1% in December 2019 on account of falling energy prices and slowing food price inflation.
• However, underlying inflation (excluding energy and food) remained relatively steady at around 2% over the year.
• Oil prices fluctuated, driven by oil supply dynamics and expectations about global demand Oil prices fluctuated over the year, reflecting oil supply dynamics in the first half of the year and expectations about global demand in the second half.
• The oil price fluctuated between USD 53 per barrel and USD 74 per barrel in 2019.
• In the second half oil prices fell amid concerns about trade tensions and the possible impact on the global economy.
• In bilateral terms, this was driven by a depreciation of the euro against the US dollar and the Japanese yen.
• This outlook was uncertain and, on balance, the risks to global activity were on the downside.
• [2] To the extent that the weakness in the manufacturing sector spread to the services sector, global activity could decelerate more quickly.
• In China, a sharper slowdown could have a larger effect on the global economy, while an escalation of the trade dispute would exacerbate the negative impact on global trade flows.
• Moreover, a sharp repricing in global financial markets could dent risk appetite globally and affect real economic activity.

1.2 Euro area economic growth moderated, while labour markets continued to improve

• Euro area annual real GDP growth moderated further in 2019, reaching 1.2%, following growth of 1.9% in the previous year (see Chart 5).
• In contrast to the growth slowdown that took place in 2018, which was driven by weaker growth in both external and domestic demand, the growth moderation in 2019 was primarily driven by a marked weakening in international trade, in an environment of prolonged global uncertainty.
• At the same time, the euro area expansion continued to be supported by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the continued albeit slower growth in global activity.
• Domestically oriented sectors showed more resilience in 2019 Output growth in 2019 was driven by the services and construction sectors, which showed continued resilience on the back of robust euro area domestic demand.
• Activity in the euro area industrial sector weakened further (see Chart6).
• [3] Chart 6 Euro area real gross value added by economic activity (index: Q1 2010 = 100)
• In 2019 domestic demand continued to contribute positively to euro area growth, amid favourable financing conditions and improving labour markets.
• Household spending was supported by rising employment and wages, which resulted in growing aggregate labour income.
• In spite of this and the modest developments in corporate profitability and declining capacity utilisation, business investment continued to contribute positively to economic growth, supported by favourable financing conditions.
• [4] At the same time, there was a slowdown in housing investment after its strong and prolonged recovery of previous years, alongside a moderation of the momentum in euro area housing markets.
• Box 1 Consumption and household sentiment remained resilient In 2019 the services and retail sectors remained resilient overall as the euro area economy slowed, despite some moderation in growth in these sectors.
• This is evident in Chart A, which displays sentiment in various sectors of the euro area economy.
• Private consumption remained resilient overall in 2019 Private consumption growth in 2019 was held up by continued growth in real disposable income, which in turn was supported by a resilient labour market.
• Labour income benefited both from continued increases in wages and further, although slowing, employment gains.
• In addition, direct taxes, social contributions and transfers are overall likely to have had a small positive impact on income growth, in contrast with 2018 when they still dampened income growth (see ChartB).
• Drivers of consumer confidence The Commissions Consumer Confidence Index is the result of averaging four sub-indices relating to perceptions of past financial and economic developments as well as expectations regarding future developments 12 months ahead (see Chart C).
• [5] While one sub-index relates to the assessment of the overall economic situation in the country, the others deal with households financial situation.
• Chart C Private consumption and consumer confidence (annual percentage changes; standardised percentage balances)


The external sector contributed negatively in net terms to euro area output in 2019. With the exception of exports to the United States, which expanded at a slower pace, the decline was broad-based, owing mainly to the bleak performance of exports of capital goods and cars. Intra-euro area trade declined as well, with the slump concentrated in trade in intermediate goods, reflecting the impairment of euro area production chains.

Euro area labour markets continued to improve, while productivity growth decelerated substantially

• Euro area labour markets continued to improve in 2019 Euro area labour markets continued to improve in 2019 (see Chart 7).
• According to an analysis based on synthetic labour market indicators, the level of labour market activity was close to its precrisis peak in the second quarter of 2019.
• In addition, labour market momentum remained above its long-term average, although it has recently moderated somewhat.


Employment increased by 1.2% in 2019, which is a robust rate when comparing with GDP growth developments. The growth of labour productivity per person employed was 0.0% in 2019, following 0.4% in 2018.[8] In spite of the increases in labour supply, the unemployment rate continued to decline and reached 7.6% in 2019, close to the rate observed in 2007. However, the dispersion of unemployment rates across euro area countries remained high.

The digital economy requires monitoring

• [9] In 2019 the degree of digitalisation of the EU economies ranged from around 40 for the least digital to around 70 for the most digital economies, according to the European Commissions Digital Economy and Society Index (DESI) (see Chart 8).
• While the EU economies scored broadly similarly in terms of connectivity, they displayed less homogeneity in terms of human capital, use of the internet, integration of digital technology and digital public services.
• Chart 8 Digital Economy and Society Index for 2019

Structural policies should help to address key challenges

• The implementation of policy recommendations remained lacklustre in 2019 The implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential, reduce structural unemployment and increase the resilience of the economy.
• This includes structural policies to improve the functioning of labour markets, increase competition in product and factor markets and enhance the business environment.
• [10] Furthermore, structural policies are needed to help address the current and future challenges posed, for example, by population ageing, digitalisation and climate change.
• The country-specific recommendations (CSRs) provide policy recommendations tailored to an individual country on how to enhance economic growth and resilience.

A mildly expansionary fiscal stance provided some support to economic activity

• The euro area general government deficit ratio increased slightly on account of a mildly expansionary fiscal stance After having been broadly neutral for five years, the euro area fiscal stance[12] turned expansionary, albeit mildly, in 2019 (see Chart 9).
• The loosening of the stance provided support to economic activity in the euro area.
• The decline in the budget balance reflected the more expansionary fiscal stance, which was partly offset by savings in interest payments, while the contribution from the cyclical position remained broadly unchanged.
• Chart 9 General government balance and fiscal stance (percentage of GDP)
• The aggregate general government debt-to-GDP ratio in the euro area continued to decline in 2019 and reached 84.5% of GDP at the end of the year.
• However, debt-to-GDP ratios remained high in a number of countries.
• The reduction in the aggregate debt ratio was supported by favourable interest rate-growth differentials and positive, but declining primary balances.

1.3 Inflationary pressures remained muted

• Headline inflation in the euro area stood at 1.2% on average in 2019, down from 1.8% in 2018.
• [14] This decline essentially reflected lower contributions from the two more volatile inflation components, energy and food.
• HICP inflation excluding energy and food, one measure of underlying inflation, remained at subdued rates, averaging 1.0% in 2019 as in 2018 and 2017, despite an increase towards the end of the year (see Chart10).
• Chart 10 HICP inflation and contributions by components (annual percentage changes; percentage point contributions)
• The contribution of total food inflation to headline HICP inflation declined to 0.3 percentage points in 2019, from 0.4 percentage points in 2018.
• Developments in total food inflation within the year were largely determined by those in the volatile unprocessed food component.
• Processed food inflation hovered around 1.9% in 2019, which was slightly below the 2018 average.
• HICP inflation excluding energy and food, like other measures of underlying inflation, moved broadly sideways during most of the year and remained below its historical average, despite the mild increase at the end of 2019.
• Weak developments in both non-energy industrial goods and services inflation contributed to subdued HICP inflation excluding energy and food.
• Indicators of price pressures at different stages of the pricing chain show that the annual rate of change of producer prices for non-food consumer goods remained broadly stable through the year, but was substantially higher than its average since 2015.
• Box 2 The euro area Phillips curve and its interpretation of recent inflation developments Since 2013 HICP inflation excluding energy and food has consistently remained below its historical average.
• High levels of economic slack weighed on inflation in the aftermath of the global financial crisis.
• However, even if by 2018 many measures of economic activity and slack had returned to average levels, and some measures even started to show signs of excess demand, underlying inflation has remained below its average since 1999 (1.3%).
• Besides economic activity, other factors, such as inflation expectations and external prices, are also crucial to understand inflation developments.
• One possible explanation could be that standard measures of economic slack do not capture all developments in economic activity relevant for inflation.
• In that spirit, Jarociski and Lenza (2018)[20] derive a measure of economic slack designed explicitly to forecast inflation.
• Such a measure would imply a much larger amount of economic slack than a more standard measure of the output gap.
• Domestic cost pressures, as measured by the growth in the GDP deflator, increased on average in 2019, at a rate above the average level of 2018 and the average since 2015 (see Chart 11).
• The annual growth in compensation per employee maintained its robust pace in 2019, standing at 2.0% on average, slightly below the 2018 average, but above its average since 2015.
• The robust average growth in compensation per employee implied, however, an increase in unit labour cost growth as productivity stagnated in 2019.
• In addition to the higher unit labour cost growth, the increase in the GDP deflator growth also reflected a rebound in profit developments (measured in terms of the gross operating surplus), which had weakened noticeably in the course of 2018.
• Chart 11 Breakdown of the GDP deflator (annual percentage changes; percentage point contributions)
• Longer-term inflation expectations declined in the course of 2019.
• Expectations for inflation five years ahead from the ECB Survey of Professional Forecasters eased to 1.7% in the fourth quarter of 2019 from 1.9% in the fourth quarter of 2018.
• Market-based measures of longer-term inflation expectations, such as the five-year inflation-linked swap rate five years ahead, also declined.

1.4 Favourable financing conditions continued to support credit and money growth

• Both money market rates and longer-term bond yields declined significantly, while equity prices increased overall, supported by lower discount rates.
• The ongoing expansion of bank credit to the private sector, coupled with the low opportunity costs of holding M3, helped to sustain the growth rates of broad money.
• Favourable financing conditions reflected the ECBs accommodative monetary policy stance and the capacity of the banking system to pass this accommodation on to the lending rates faced by firms and households.
• Increasing valuations of financial asset and real estate holdings supported household wealth, which in turn underpinned private consumption growth.
• Chart 12 Ten-year sovereign bond yields in the euro area, the United States and Germany (percentages per annum; daily data)
• Euro area equity prices increased on account of lower discount rates In 2019 euro area equity prices increased significantly.
• The broad index for euro area NFC equity prices increased by 20.7% over the course of 2019, while an index of euro area bank equity prices rose by 9.7% (see Chart 13).
• Chart 13 Equity market indices in the euro area and the United States (index: 1 January 2018 = 100)
• This said, the growth of borrowing from banks and the issuance of debt securities remained solid, supported by favourable financing conditions, and net issuance of unlisted shares was robust, underpinned by an increase in the number of mergers and acquisitions.
• Bank lending rates declined further broadly in line with the evolution of market rates to new historical lows during 2019.
• Further monetary policy easing by the ECB during 2019 was transmitted to financing conditions, which became more favourable.
• Chart 14 Net flows of external financing to non-financial corporations in the euro area (annual flows; EUR billions)
• Despite a moderating momentum in housing markets, net wealth benefited from further house price increases, which resulted in significant valuation gains on households real estate holdings.
• In addition, households also registered notable valuation gains on their financial asset holdings.
• Furthermore, rising house prices and favourable financing conditions contributed to the continued gradual upward trend in the annual growth rate of bank loans to households for house purchase.
• Household gross indebtedness measured as a percentage of household nominal gross disposable income remained at levels well above its average pre-crisis level.
• M3 and credit growth recovered in 2019 Overall, bank lending to the private sector was solid, with its annual growth rate (adjusted for loan sales, securitisation and notional cash pooling) increasing to 3.7% in December 2019, from 3.4% in December 2018. Credit growth remained the largest driver of broad money growth (see the blue parts of the bars in Chart 16).


Chart 16 (annual percentage changes; contributions in percentage points; adjusted for seasonal and calendar effects)

• Growth in overnight deposits reflected the strong expansion of overnight deposits held by both households and NFCs.
• As a result, the narrow monetary aggregate M1, which comprises currency in circulation and overnight deposits, continued to grow at a robust pace.

2 Monetary policy: determination to act as appropriate

• These successive interventions underlined the Governing Councils determination to act as appropriate to support the return of inflation to a sustained convergence path towards its medium-term aim.
• At the end of 2019 monetary policy-related assets accounted for 70% of the total assets on the Eurosystems balance sheet.
• The size of the balance sheet stabilised at 4.7 trillion in 2019, in line with the level reached at the end of the previous year.
• Risks related to the large balance sheet continued to be mitigated by the ECBs risk management framework.

2.1 A first round of monetary policy measures to keep policy accommodation ample amid rising external headwinds

• The Governing Council highlighted that monetary policy needed to remain patient, prudent and persistent.
• In particular, activity in the manufacturing sector had decelerated markedly, mainly on account of external headwinds, as global growth and trade dynamics remained weak.
• In response to a material downgrade of the growth and inflation outlook, the Governing Council therefore decided at its March meeting on a package of policy measures to provide additional monetary accommodation.
• First, it decided to shift out the calendar-based leg of its forward guidance on policy rates.
• Third, in addition to the change in policy rate guidance, a new series of quarterly targeted longer-term refinancing operations (TLTROIII) was announced.
• These operations would start in September 2019 and end in March 2021, and each operation would have a maturity of two years.
• In particular, the pricing of the TLTROIII operations would take into account a thorough assessment of the bank-based transmission channel of monetary policy, as well as further developments in the economic outlook.

A second round of additional monetary policy accommodation and deteriorating confidence in the inflation outlook

• Furthermore, HICP inflation decreased further, mainly on account of temporary factors, and measures of underlying inflation continued to move sideways.
• In the light of the prolongation of uncertainties and their implications for the inflation outlook, the Governing Council recognised the need to adjust the monetary policy stance for the second time in 2019 and provide additional monetary accommodation for inflation to remain on a sustained path towards its medium-term aim.
• Therefore, the Governing Council decided at its June meeting to strengthen its forward guidance on policy rates by shifting out further the calendar-based element of the forward guidance.
• Over the course of the summer, softening global growth dynamics and weak international trade continued to weigh on the euro area outlook.
• Moreover, the Governing Council viewed the symmetry of its medium-term inflation aim as an important element to bolster the achievement of a sustained adjustment in inflation to its aim.
• the design of a tiered system for reserve remuneration) and possibilities for the size and composition of potential new net asset purchases.
• These announcements paved the way for the potential implementation of a comprehensive policy package at the Governing Councils next monetary policy meeting if the inflation outlook failed to improve in line with its aim.

A third round of policy accommodation with a comprehensive package of measures in response to persistently low inflation rates

• Overall, the Governing Council was confronted with a protracted slowdown in the euro area economy, persistent downside risks and an inflation outlook that continued to fall short of its medium-term inflation aim.
• In particular, successive and significant downward revisions to the inflation outlook had brought projected inflation in 2021 down from 1.8% in the December 2018 projections to 1.5% in the September 2019 projections.
• Measures of underlying inflation remained muted and indicators of inflation expectations remained at low levels.
• Against this background, the Governing Council agreed that a third round of easing of the monetary policy stance was warranted to support the return of inflation to a sustained convergence path towards its inflation aim.
• The reduction in the deposit facility rate was accompanied by a reformulation of the Governing Councils forward guidance on the expected path of policy rates.
• Second, it decided to restart net purchases of bonds under the APP at a monthly pace of 20 billion as from 1 November (see Chart 18) with the expectation to terminate net purchases shortly before the Governing Council started to raise the key ECB interest rates.
• Chart 18 Monthly net asset purchases and total redemptions under the APP in 2019 (EUR billions)
• The more favourable TLTRO conditions sought to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy.
• TLTROIII was recalibrated to preserve favourable bank lending conditions, ensure a smooth transmission of monetary policy and incentivise banks to keep credit flowing to their customers.
• Finally, the two-tier system for reserve remuneration was designed to alleviate the direct cost of negative interest rates for banks in order to support the bank-based transmission of monetary policy.
• Consequently, easier market funding conditions continued to be passed through to the lending conditions faced by firms and households.

Monitoring inflation developments in the light of a tentative stabilisation in the growth outlook, while standing ready to act

• In the light of the persistent uncertainties and downside risks, substantial additional monetary policy accommodation was implemented over the course of 2019.
• All elements of the measures taken continued to work together and contributed to a further decline in bank funding costs (see Chart 19).
• Banks very favourable financing conditions were passed on to the wider economy, with borrowing conditions for firms and households standing at or close to their historical lows (see Chart 20).
• Chart 19 Composite cost of debt financing for banks (composite cost of deposit and unsecured market-based debt financing; percentages per annum)


Chart 20 Composite bank lending rates for non-financial corporations and households (percentages per annum)

2.2 Eurosystem balance sheet dynamics amid the restart of net asset purchases

• In December 2018 the Eurosystem ended net asset purchases under the APP and, in 2019, it fully reinvested the principal payments from maturing securities.
• As of 1November 2019 the Eurosystem restarted net asset purchases at an average monthly pace of 20 billion.
• At the end of 2019 the size of the Eurosystems balance sheet stood at 4.7 trillion, unchanged from the level at the end of 2018.
• At the end of 2019 monetary policy-related assets amounted to 3.3 trillion, accounting for 70% of the total assets on the Eurosystems balance sheet (down from 72% at the end of 2018).
• Other financial assets on the balance sheet mainly consisted of foreign currency and gold held by the Eurosystem and euro-denominated non-monetary policy portfolios.
• Chart 21 Evolution of the Eurosystems consolidated balance sheet (EUR billions)

Average APP portfolio maturity and distribution across assets and jurisdictions

• Following the Governing Council decisions, the monthly net purchase targets for the APP have changed over time.
• At the end of 2019 APP holdings amounted to 2.6 trillion At the end of 2019 APP holdings amounted to 2.6 trillion (at amortised cost).
• The ABSPP accounted for 1% (28 billion), the CBPP3 for 10% (264 billion) and the CSPP for 7% (185 billion) of total APP holdings at the year-end.
• Out of the private sector purchase programmes, the CSPP contributed the most to the growth in APP holdings in the last two months of 2019, with 7.7 billion of net purchases.
• The PSPP accounted for 82% of total APP holdings The PSPP accounted for the bulk of the APP holdings, amounting to 2.1 trillion or 82% of total APP holdings at the end of 2019, the same proportion as at the end of 2018.
• Under the PSPP, the allocation of purchases to jurisdictions was guided by the ECBs capital key on a stock basis.
• The weighted average maturity of the PSPP holdings stood at 7.12 years at the end of 2019, somewhat lower than the 7.37 years at the end of 2018, with some variation across jurisdictions.

Developments in Eurosystem refinancing operations

• The outstanding amount of Eurosystem refinancing operations decreased by 109.3 billion since the end of 2018, standing at 624.1 billion at the end of 2019.
• This can be largely attributed to the voluntary repayments of 208 billion of the TLTRO II series.
• The amount of 101.1 billion allotted in the first two operations of the TLTRO III series only partially compensated for the decline in outstanding refinancing operations due to TLTRO II repayments.
• The weighted average maturity of outstanding Eurosystem refinancing operations decreased from around 1.8 years at the end of 2018 to around 1.2 years at the end of 2019.

2.3 Financial risks associated with the APP are mitigated through appropriate frameworks

• The APP risk control frameworks apply to the purchase of additional assets, the reinvestment of principal payments from maturing APP holdings, and APP holdings for as long as they remain on the Eurosystems balance sheet.
• Outright asset purchases require specific risk control frameworks The risk control frameworks not only serve the purpose of mitigating financial risks, but also contribute to a successful achievement of the policy objectives by steering asset purchases towards a diversified market-neutral asset allocation.
• In addition, the design of the risk control frameworks also takes into consideration non-financial risks such as legal, operational and reputational risks.
• In the following, the current financial risk control frameworks governing the implementation of the APP are described.
• Table 1 Key elements of the risk control frameworks for the APP

Eligibility requirements for outright asset purchases

• Eligibility criteria apply to all asset classes Only marketable assets which are accepted as collateral for Eurosystem credit operations are potentially eligible for outright asset purchases.
• The collateral eligibility criteria for Eurosystem credit operations are stated in the general framework for monetary policy instruments.
• In addition to the eligibility criteria above, specific eligibility criteria apply depending on the purchase programme.
• Moreover, for the CSPP and the CBPP3, assets issued by wind-down entities and asset management vehicles are excluded from purchases.
• In addition, asset purchases must not circumvent the rules prohibiting the monetary financing of public authorities as set out in Article 123(1) of the Treaty on the Functioning of the European Union.

Credit risk assessments and due diligence procedures

• Credit risk assessments and due diligence procedures are conducted on an ongoing basis For the private sector purchase programmes, the Eurosystem conducts appropriate credit risk assessments and due diligence procedures on the purchasable universe on an ongoing basis.
• These assessments and procedures follow the principle of proportionality, where riskier assets are subject to more in-depth analysis.
• If warranted, additional risk management measures may apply, also subject to the principle of proportionality.

Pricing frameworks

• The pricing frameworks ensure that purchases are made at market prices The pricing frameworks for the APP ensure that purchases are made at market prices in order to minimise market distortions and facilitate the achievement of risk efficiency.
• These frameworks take into account available market prices, the quality of such prices and fair values.
• Ex post price checks are also conducted in order to assess whether the transaction prices reflected market prices at the time of the transactions.

Benchmarks

• Benchmarks are used to ensure diversification Benchmarks are used to ensure the build-up of a diversified portfolio and contribute to mitigating risks.
• The benchmarks for the private sector purchase programmes are guided by the market capitalisation of the purchasable universe, i.e.
• In the case of the PSPP, the ECBs capital key guides the allocation of purchases per jurisdiction on a stock basis.

Limits

• Issue and issuer limits are an effective tool to limit risk concentration Limit frameworks are in place for the APP.
• The limits are fine-tuned according to the asset class, with a distinction being made between public sector assets and private sector assets.
• PSPP issue and issuer limits are applied to safeguard market functioning and price formation, to limit risk concentration and to ensure that the Eurosystem does not become a dominant creditor of euro area governments.
• In addition to these issue limits, issuer limits are applied for the CBPP3 and the CSPP.
• Moreover, lower limits may apply if warranted based on the outcome of the credit risk assessment and due diligence procedures, as explained above.

3 Euro area financial sector: increasing bank resilience amid risks

• On the one hand, several factors supported financial stability, including a growing economy and the sound capitalisation of euro area banks.
• On the other hand, increasing downside risks to future growth weighed on the financial stability environment.
• Strong risk-taking in financial and real estate markets continued to fuel the build-up of asset price vulnerabilities, while risks continued to increase in the growing non-bank financial sector.
• In this environment, euro area countries, in consultation with the ECB, implemented a number of macroprudential measures to mitigate and build up resilience to systemic risks.

3.1 The financial stability environment in 2019

• The financial stability environment remained challenging during 2019.
• The environment characterised by low (or negative) interest rates and low yields on safe assets challenged financial institutions profitability.
• The deteriorating growth outlook and the associated expected lower-for-longer interest rate environment weakened bank profitability prospects further.
• Four key financial stability vulnerabilities were identified Four key financial stability vulnerabilities for the euro area over a two-year horizon were identified by the ECB during 2019 and discussed in the ECBs semi-annual Financial Stability Review (see Figure 1): Figure 1 Key financial stability vulnerabilities in the euro area
• Other vulnerabilities beyond the short to medium-term horizon with a potential negative impact on the financial sector were also highlighted by the ECB during 2019.
• Notably, efforts to assess the financial stability implications of climate change were stepped up, with enhanced communication on the topic.
• In addition, during 2019 the ECB looked at the implications of developments in financial technology at both the micro- and macroprudential levels (see Box 4).
• Physical risks are related, inter alia, to the increased severity and frequency of adverse weather events.
• [33] Transition risks relate to the possible side effects and costs of policies aimed at climate risk mitigation.
• The resulting adjustment towards a low-carbon economy can take place in an orderly or disorderly manner.
• Furthermore, the transition or related policies may lower the profitability of carbon-intensive firms, leading to higher credit risks for banks exposed to these sectors.
• Technological policies and fiscal mitigation and adaptation policies, such as carbon taxation, typically have a direct impact on prices.
• Monitoring and assessment of financial stability risks As a part of climate change adaptation, the ECB actively monitors physical and transition risks for banks and also non-bank financial institutions.
• In the light of the global nature of the climate challenge, it is critical to develop a common understanding of the financial risks posed by climate change.
• In this respect, the ECB and several Eurosystem national central banks are members of the Network for Greening the Financial System (NGFS) and are playing an important role in shaping nascent work on gauging financial stability risks from climate change along with both the Financial Stability Board and the Basel Committee on Banking Supervision (BCBS).
• The ECB is actively cooperating with national competent authorities, financial regulators (e.g.

3.2 Macroprudential policy to build sector-wide resilience

• Macroprudential policies are a key instrument to address risks to financial stability The emergence of systemic risks in the financial system can be addressed through macroprudential policies and the SSM Regulation assigns an important role and specific powers to the ECB in this field.
• In response to the main risks prevailing in 2019, national authorities in the euro area, in consultation with the ECB, implemented notably more macroprudential measures than in the previous year, with a view to mitigating and strengthening resilience to systemic risks.

Continued macroprudential efforts to preserve financial stability

• The ECB assesses macroprudential policies in euro area countries The ECB continued its extensive efforts in the field of macroprudential policy, thereby making an important contribution to preserving financial stability.
• The ECB and the national authorities also continued to engage in broad and open discussions on the use of macroprudential instruments, and on the enhancement of the analytical toolkit in the field of macroprudential policy.
• These efforts further improved the methods and processes for assessing systemic risks and the adequacy of macroprudential policy measures in the euro area.
• Releasable macroprudential buffers can play an important countercyclical role Macroprudential discussions in 2019 focused on the importance of banks remaining resilient and able to withstand adverse shocks to the macro-financial environment.
• Only with releasable buffers in place can macroprudential policy play a countercyclical role.
• The new framework will help to ensure that more systemic banks can be subject to higher buffer requirements in certain jurisdictions, thus reducing risks to financial stability.
• Furthermore, the ECB continued to enhance its communication on macroprudential policy issues, raising awareness by making the ECBs ongoing work and thinking in this field more transparent.
• The November 2019 Financial Stability Review contained a section on how macroprudential policies can address vulnerabilities in the financial system.
• The ECB also continued to publish on its website an overview of currently active macroprudential measures in countries subject to ECB Banking Supervision.

Macroprudential policy decisions during 2019

• The ECB assessed 106 macroprudential policy decisions in 2019 In line with its legal mandate, the ECB in 2019 assessed notifications by the national authorities in the euro area of 106 macroprudential policy decisions regarding instruments targeting cyclical and structural systemic risks, as well as other instruments under Article 458 of the Capital Requirements Regulation (CRR).
• The Governing Council of the ECB did not object to any of the macroprudential policy decisions that national authorities notified during 2019.
• The national competent authorities of seven euro area countries had announced the activation of a CCyB rate above 0% by the end of 2019, compared with four countries in the previous year.
• In 12 countries the buffer had not been activated by the end of 2019.
• The Bundesanstalt fr Finanzdienstleistungsaufsicht in Germany decided in June 2019 to introduce a positive CCyB rate of 0.25%.
• In July 2019 Nrodn banka Slovenska decided to further increase the CCyB rate from 1.5% to 2% in Slovakia.
• By the end of 2019, 13 countries in the euro area had introduced such measures, which fall under the sole competence of the national authorities.
• Regarding macroprudential instruments targeting other risks, the ECB assessed national authorities decisions on O-SII buffers, systemic risk buffers, as well as macroprudential measures under Article 458 of the CRR.

Cooperation with the European Systemic Risk Board

• The ECB continued to closely cooperate with and support the ESRB The ECB continued to provide analytical, statistical, logistical and administrative support to the European Systemic Risk Board (ESRB) Secretariat, which is in charge of the day-to-day business of the ESRB.
• The ESRB is responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk.
• The ECB regularly contributed to the ESRBs ongoing identification and monitoring of potential systemic risks and provided general support to work undertaken by the ESRB.
• The ECB also greatly contributed to the ESRBs initial considerations on developing a common framework for the macroprudential stance.
• A dedicated report was published in April 2019 as a first step towards such a common framework.
• Finally, the ECB actively participated in the ESRBs European Systemic Cyber Group, which developed an analytical framework for assessing cyber risks.
• More detailed information on the ESRB can be found on its website and in its Annual Reports.

3.3 Microprudential activities to ensure the soundness of individual banks

• Throughout these years its microprudential activities have contributed to fostering a stable European banking sector and a level playing field for all banks in the euro area.
• Thanks to the progress made since 2014, European banking supervision is evolving into a mature institution.
• Supervisory tools and methods continued to be improved Throughout 2019 ECB Banking Supervision continued to improve its tools and methods.
• In February 2019 the ECB also published aggregate stress-test results for all participating banks under its supervision, as a complement to the 2018 EU-wide stress test.
• The results of both exercises feed respectively into the 2018 (published in April 2019) and the 2019 Supervisory Review and Evaluation Process.
• More detailed information on ECB Banking Supervision can be found on its website and in the 2019 ECB Annual Report on supervisory activities.
• Some fintech firms are also offering new financial services, especially in the area of payments, putting pressure on banks.
• This involves assessing the impact of fintech on banks business models and the main associated risks.
• This input contributes to further developing the approach to the supervision of banks using innovative technologies.

3.4 The ECB’s contribution to European policy initiatives

• With this concrete step, EU Member States and institutions fostered financial integration and stability and strengthened economic resilience.
• Today, however, there is still scope to further integrate the single banking market.
• This would contribute to the uniform transmission of monetary policy and further remove the destabilising relationship between banks and sovereigns, which was at the heart of the euro area sovereign debt crisis.

Completing the banking union

• In-depth work to complete the banking union was carried out in 2019 In 2019 the ECB was fully involved in the work in EU fora to strengthen the banking union.
• In June 2019 the Euro Summit acknowledged in its declaration the progress made on deepening Economic and Monetary Union and supported the continuation of technical work on strengthening the banking union.
• [43] The ECB also supported further analysis of the impediments to cross-border integration, notably the barriers to the free flow of capital and liquidity within the banking union.
• Such an encompassing agreement would allow Europeans to reap the full benefits of the banking union, including market integration and an equal protection of depositors.
• In line with the concept that risk sharing and risk reduction are two mutually reinforcing processes, the ECB contributed to the further reduction of risks in the banking sector.
• The second pillar of the banking union was also a major focus of the year.

Advancing the capital markets union

• CMU can facilitate the transmission of monetary policy In 2019 the ECB continued to advocate the completion of the capital markets union (CMU).
• A genuine capital markets union, if effectively realised, would significantly deepen financial integration and strengthen Economic and Monetary Union, as well as foster the international role of the euro.
• As underlined in the ECBs Financial Stability Review in 2019, completing the capital markets union is a fundamental prerequisite to enhance risk sharing and improve the resilience of the euro area to economic shocks.
• Further harmonisation efforts are needed to advance CMU In 2019 the ECB underlined the key priorities to advance the capital markets union in EU fora.
• [44] In the long term, providing additional supervisory powers to the European Securities and Markets Authority would foster a genuine capital markets union with a consistent implementation of the single rulebook across the European Union.

Macroprudential policy for the non-bank financial sector

• Continued growth in the non-bank financial sector raises potential financial stability concerns While being fully supportive of more market-based financing of the euro area economy, the ECB remains concerned about the rapid growth of the non-bank financial sector and its potential implications for financial stability.
• While a greater role for non-bank financial intermediation in financing the economy is part of the CMU agenda, it continues to be crucial to effectively monitor this sector.
• Given these developments, ensuring a sound prudential framework for non-bank financial institutions is indispensable to adequately address the systemic risks that could materialise in this sector.

4 Smooth functioning of market infrastructure and payments

• One of the basic tasks of the Eurosystem is to ensure the smooth operation of payment systems.
• The Eurosystem plays a central role in developing, operating and overseeing market infrastructures and arrangements that facilitate the safe and efficient flow of payments, securities and collateral across the euro area.

4.1 TARGET Services

• Currently, the Eurosystems TARGET Services consist of three components: TARGET2, a real-time gross settlement system for euro payment transactions related to the Eurosystems monetary policy operations, as well as bank-to-bank and commercial transactions; TARGET2-Securities (T2S), a single platform for Europe-wide securities settlement; and TARGET Instant Payment Settlement (TIPS), which allows payment service providers to offer their customers the instant transfer of funds, around the clock, every day of the year.
• More than 1,000 banks use TARGET2 to initiate transactions in euro, either on their own behalf or on behalf of their customers.
• In 2019 TARGET2 processed on average 344,120 payments per day with an average daily value of 1.7 trillion.
• TARGET2 to be replaced with a new real-time gross settlement system in 2021 TARGET2 has been running smoothly for over a decade.
• However, as the payments ecosystem has changed significantly during that time owing to technological developments, new regulatory requirements and changing user demands, the Eurosystem is planning to replace TARGET2 with a new real-time gross settlement (RTGS) system in November 2021, and at the same time to optimise liquidity management across all TARGET Services.
• Furthermore, two network service providers signed contracts with the Eurosystem to offer users network-agnostic connectivity to all Eurosystem market infrastructure services via the new Eurosystem Single Market Infrastructure Gateway (ESMIG).
• In 2019 for the first time, an independent external examiner appointed by the ECB Governing Council performed technical and operational examinations of T2S services.
• Furthermore, the Eurosystem is developing a new TARGET Services component, namely the Eurosystem Collateral Management System (ECMS).

4.2 Innovation and integration in market infrastructure and payments

• In the retail payments market, for example, new EU legislation allowing third-party access to payment accounts, the launch of instant payments and technical innovations in general have led to the emergence of new market players, new channels for accessing payment services and new ways of initiating payments.
• (See Box 5 for information on crypto-assets, stablecoins and central bank digital currency.)
• The challenge for the Eurosystem with respect to these developments is twofold: it must foster integration and innovation in its role as a catalyst and promote the safety and efficiency of market infrastructure and payments in its role as overseer.
• Crypto-assets allow individuals and businesses to conduct transactions directly with each other without the need for a trusted third party.
• The volatility of crypto-assets has in recent years been higher than the volatility observed, for example, in various commodities markets.
• Before stablecoin initiatives go live these issues must be addressed through appropriate system design and governance, and risk-proportionate oversight requirements and regulation.
• Similarly, for point-of-interaction payments (i.e.
• point-of-sale and e-commerce payments), a pan-European solution addressing the needs of European users has not yet emerged.
• New retail payments strategy, payment instruments oversight framework and collateral management standards To address this issue, in 2019 the Eurosystem adopted a new retail payments strategy.
• The strategy supports the development of a market-led pan-European solution for point-of-interaction payments and sets out the key objectives for such a solution.
• The Eurosystem is fostering market-wide harmonisation in the post-trade area to support the further integration of financial markets in Europe.
• National Stakeholder Groups have been asked to prepare their respective adaptation plans with a view to complying with the standards.
• At the end of 2019, 90% of the markets that participate in T2S complied with the core harmonisation standards (compared with 85% in 2018).

5 Efforts to support market functioning, and financial services provided to other institutions

• In October 2019 the ECB began publishing the euro short-term rate (STR), a new reference interest rate that is based entirely on money market statistical reporting data.
• The STR will progressively replace the euro overnight index average (EONIA) and is expected to become one of the main reference rates in euro area markets.
• In 2019 the ECB continued to be responsible for the administration of various financial operations on behalf of the EU, and continued its overall coordinating role in relation to the Eurosystem Reserve Management Services framework.

5.1 The €STR, the new overnight reference rate for euro area money markets

• On 2 October 2019 the ECB began publishing a new overnight reference interest rate for the euro area markets.
• The euro short-term rate, or the STR, reflects the wholesale euro unsecured borrowing costs of euro area banks.
• The methodology of the STR is designed to comprehensively reflect the underlying money market dynamics.
• In 2019 the average daily volume of transactions underlying the STR calculation stood at 31.1 billion.
• If one of these requirements is not met, a short-term contingency procedure is triggered, thus ensuring the availability of the rate.
• For example, internal systems were adjusted to take into account the different timing for publishing the reference rate, i.e.
• Second, the bank holiday in Germany on 3 October 2019 had a negligible impact on the rate and its various metrics.
• Furthermore, the volatility of the STR remained contained, illustrating the robustness of the methodology in the face of such events.


Chart 24 €STR data sufficiency metrics since 9 September 2019 (left-hand scale: percentages; right-hand scale: number of banks)

• Examples of such use on both sides of the balance sheet include bond issuances and the origination of loans.
• As recommended by the Financial Stability Board[45], the use of overnight near-risk-free rates should be encouraged across global interest rate markets where appropriate, and contracts referencing IBORs should have robust fallback provisions.
• In the euro area, the authorisation of EURIBORs administrator on 3 July 2019 allowed for the continued use of the benchmark; furthermore, unlike LIBOR, EURIBOR is not scheduled to be discontinued.
• Therefore, the STR and term structures based on the STR could function as a fallback in EURIBOR-linked contracts and also as an alternative rate to EURIBOR.

5.2 Administration of EU borrowing and lending operations

• The ECB is responsible for the administration of the borrowing and lending operations of the EU under the medium-term financial assistance (MTFA) facility[46] and the European Financial Stabilisation Mechanism (EFSM)[47].
• In 2019 the ECB processed interest payments in relation to the loans under the MTFA.
• As at 31 December 2019 the total outstanding amount under this facility was 200 million.
• In 2019 the ECB also processed various payments and interest payments in relation to the loans under the EFSM.
• The ECB processes payments for various EU loan programmes Similarly, the ECB is responsible for the administration of payments arising in connection with operations under the European Financial Stability Facility (EFSF)[48] and the European Stability Mechanism (ESM)[49].

5.3 Eurosystem Reserve Management Services

• A number of Eurosystem central banks provide services under the ERMS framework In 2019 a comprehensive set of financial services continued to be offered within the Eurosystem Reserve Management Services (ERMS) framework established in 2005 for the management of customers euro-denominated reserve assets.
• A number of Eurosystem national central banks (the Eurosystem service providers) offer the complete set of investment services, under harmonised terms and conditions and in line with market standards, to central banks, monetary authorities and government agencies located outside the euro area, and to international organisations.
• The ECB performs an overall coordinating role, monitors the smooth functioning of the services, promotes changes to improve the framework and prepares related reports for the ECB Governing Council.
• In 2019 one additional central bank started offering ERMS services, bringing the total number of Eurosystem service providers to ten.
• The number of customer accounts in the ERMS was 273 at the end of 2019, compared with 277 at the end of 2018.
• In the case of the asset purchase programme, as an example of accountability practices, the Eurosystem provides regular data on the volume and the distribution of purchases across programmes and jurisdictions.
• The ECB has previously used several channels to disclose FXI information, including its weekly financial statements, Annual Accounts and Annual Report.
• Going forward, the ECB will publish FXI data in a table on its website and in the ECBs Annual Report.
• The ECBs Annual Report will from now on also provide additional background information and summarise any new developments in FXIs, as appropriate.
• In addition, the ECB Annual Accounts will state whether or not any FXIs were carried out during the year under review.
• In the interests of full transparency, the absence of any FXIs will also be explicitly stated in the quarterly table.

6 More banknotes and low level of counterfeiting

• The ECB and the euro area national central banks (NCBs) are responsible for issuing euro banknotes within the euro area, for guaranteeing the availability of cash and for maintaining confidence in the currency.
• The number and value of euro banknotes in circulation have been rising since their introduction in 2002, and generally at a faster pace than economic growth.
• In May 2019 the new 100 and 200 banknotes were introduced with new, innovative security features, completing the Europa series of banknotes.

6.1 Banknote circulation continued to increase

• In 2019 the number and value of euro banknotes in circulation grew by around 6.4% and 5.0% respectively.
• At the end of the year there were 24.1 billion euro banknotes in circulation, with a total value of 1,293 billion (see Charts 25 and 26).
• The 50 banknote accounted for nearly half of both the number and value of banknotes in circulation.
• The total value of 100 banknotes in circulation at the end of 2019 stood at 305 billion, which is equal to the combined value of all euro banknote denominations in circulation in July 2002.
• Chart 25 Number and value of euro banknotes in circulation (left-hand scale: EUR billions; right-hand scale: billions)


Value of euro banknotes in circulation by denomination (EUR billions)

• In terms of value, one-third of euro banknotes are held outside the euro area It is estimated that, in terms of value, around one-third of the euro banknotes in circulation are held outside the euro area.
• The production of euro banknotes is shared among euro area NCBs, which were altogether allocated the production of around 3.7 billion banknotes in 2019.
• In 2019 euro area NCBs checked the authenticity and condition of some 30 billion banknotes, withdrawing around 5 billion from circulation as unfit.
• The Eurosystem also continued its efforts to help banknote equipment manufacturers to ensure that their machines meet the ECBs standards for checking euro banknotes for authenticity and condition prior to recirculation.
• In 2019 credit institutions and other professional cash handlers checked some 38 billion euro banknotes for authenticity and condition.

Introduction of the new €100 and €200 banknotes and stopping issuance of the €500

• The introduction of the new notes completed the Europa series, which was launched in 2013 with the 5 banknote.
• The issuance of the 500 banknote was stopped between January and April 2019 by all euro area NCBs.
• As is the case for the other denominations of the first series of euro banknotes, the 500 banknotes will remain legal tender and can therefore continue to be used as a means of payment and store of value.

6.2 Euro banknote counterfeiting remained low in 2019

• The number of counterfeit euro banknotes remained low in 2019, with around 559,000 counterfeits being withdrawn from circulation.
• Compared with the number of genuine euro banknotes in circulation, the proportion of counterfeits further decreased and is very low.
• Chart 27 Number of counterfeit banknotes per million genuine euro banknotes in circulation (parts per million)
• Counterfeiters mainly produce counterfeit 20 and 50 banknotes, which together accounted for more than 70% of the total number of counterfeits withdrawn from circulation in 2019.
• The share of counterfeit 50 banknotes declined in 2019.
• The ECB also cooperates with Europol, Interpol and the European Commission in pursuit of this goal.

6.3 Pursuing greener banknotes

• In 2004 the Eurosystem conducted a life cycle assessment of euro banknotes based on the ISO 14040 series of standards, pioneering in assessing the environmental impact of banknotes over their whole life cycle.
• This complex assessment has been the main source of information for implementing measures to reduce the environmental impact of euro banknotes.
• For instance, the Eurosystem has put in place an accreditation system for manufacturers of euro banknotes and their components which includes an environmental management system and has focused, among other things, on moving gradually towards the target of 100% use of sustainable cotton fibres in euro banknote paper.

7 Statistics

• These statistics are also used by public authorities, financial market participants, the media and the general public, contributing to the fulfilment of the ECBs transparency objective.
• This chapter focuses on how to contain the reporting burden for banks and on statistics relating to fintech, including crypto-assets.
• Two boxes focus respectively on the independent determination process for the euro short-term rate (STR) based on the relevant Guideline (Box 7) and on the medium-term strategy for financial accounts statistics, setting out objectives for the coming years (Box 8).

7.1 Containing the reporting burden

• This resulted in an increase in the reporting burden for banks.
• Another issue that the banking industry is facing is the lack of cross-country harmonisation in reporting schemes, which originates from the ESCBs traditional approach whereby NCBs can fulfil European statistical requirements through their national reporting frameworks.
• This leads to redundancies and overlaps as well as complex reporting schedules and processes.
• The Integrated Reporting Framework consolidates the existing ESCB statistical requirements for banks Against this background, in 2016 the ESCB began working on consolidating the existing statistical requirements for banks through the development of an Integrated Reporting Framework (IReF), designed to establish an integrated solution for ESCB statistical reporting across countries and statistical domains.
• The Banks Integrated Reporting Dictionary complements the Integrated Reporting Framework As shown in Figure 2, the ESCBs overall strategy for collecting data from banks also foresees supporting reporting agents in optimising the organisation of the information stored in their internal operational systems (e.g.
• The scope of the BIRD goes beyond ESCB statistical datasets to cover supervisory and resolution reporting.
• The first step consisted of a qualitative stock-taking questionnaire on the state of play of statistical reporting across domains and countries in order to identify the main cost factors and potential benefits of the IReF.
• The next step in 2020 will be to assess, by means of a questionnaire, the costs and benefits of these scenarios.
• The new questionnaire will be based on a draft IReF reporting scheme, which will allow respondents to rate scenarios based on concrete proposals for reporting requirements.
• If the outcome of the overall cost-benefit analysis is satisfactory, the Governing Council of the ECB may decide to proceed with the IReF.

7.2 New and enhanced euro area statistics

Fintech and crypto-assets

• The ECB monitors the crypto-asset phenomenon and fintech Statistics on technological innovation that is used to support or provide financial services (fintech) are being developed and enhanced, in order to continue meeting statistics users needs in a digitally transformed world.
• Using big data technologies, it was possible for the ECB to create an automated set of procedures for collecting, handling and integrating several crypto-asset data collections.
• An important component of this work is the investigation of the statistical classification of crypto-assets.
• With respect to fintech, while the discussion on fintech statistical definitions as well as related data needs is also taking place in international fora[56], the ECB has been building an experimental internal dataset on fintech entities in the euro area[57], in line with similar initiatives implemented at some euro area NCBs.
• The aim is to gain insights into linkages between the financial sector and fintech, the opportunities the latter unlocks and the risks it poses.
• Immediately after publication by the ECB, the STR is made available by commercial data providers via real-time market data feeds.
• During this process the ECB, in cooperation with the NCBs, asks the reporting institutions to verify that the identified transactions are correct.

• It is urgent to find an agreement on the recovery plan and the next multiannual budget.
• The crisis increased the imbalance between European regions and the recovery plan should help fill this gap.
• As budgetary authority, the Parliament must be associated to the design of the recovery plan.
• Note to editors

  The European Parliament will adopt next week in plenary a resolution on the Recovery Plan.

• BUDG Members voted, on Monday 4 May, by means of a novel remote voting system, on the BUDG opinion to the ECON report on the budgetary instrument for convergence and competitiveness (BICC).
• The BICC aims to promote convergence and cohesion within the Union by providing euro-area Member States with financial support for reforms and investments.
• It is the largest component of a wider MFF sectoral programme, namely the Reform Support Programme (RSP).
• BUDG is associated with the ECON committee in preparing this legislative report, with both committees having shared competence over parts of the Regulation.