Outright Monetary Transactions

SPEECH

Monetary policy in changing conditions

Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the second EBI Policy Conference on “Europe and the Covid-19 Crisis – Looking back and looking forward”

• Frankfurt, 4 November 2020 Europe is in the midst of the second wave of the coronavirus (COVID-19) pandemic.
• Since the start of the pandemic, monetary policy has contributed to mitigating the social and economic costs of this crisis.
• In my remarks this afternoon, I will explain the ECBs response to the coronavirus crisis in more detail.
• I will start by briefly recalling the measures that the Governing Council took in response to the first wave of infections in spring.

Monetary policy response to the first wave

• The euro area sovereign bond market fragmented, causing spreads on lower-rated government bonds to rise sharply (see right chart slide 2).
• At the same time, corporate credit spreads reached levels last seen in the midst of the euro area sovereign debt crisis.
• In short, the very stability of our financial system was at risk and the transmission of our monetary policy was severely impaired.
• Our response consisted of two carefully calibrated, mutually reinforcing and complementary pillars.
• To help meet these objectives, purchases under the PEPP can be allocated flexibly across time, asset classes and jurisdictions.
• These considerations form the core of the second pillar of our response: preserving favourable bank lending conditions and acting as a lender of last resort to solvent banks.
• Between March and May alone, euro area banks extended 245 billion of credit to firms (see left chart slide 5).
• Price and wage levels would probably have fallen significantly, running counter to our price stability mandate.

Downside risks to the economic outlook from the second wave

• The exponential surge in new COVID-19 infections since early October has, however, visibly skewed the risks to the economic outlook for the fourth quarter of 2020 to the downside.
• Incoming data point to an inversion in the trajectory of the euro area economy.
• Most notably, this time new partial lockdowns have had a much more localised impact on financial markets.
• Of course, the resilience in financial markets reflects, and is conditional on, the forceful monetary and fiscal policy response to the crisis.
• In the current environment of exceptional uncertainty, it would be naive to take the stability of euro area bond markets for granted.
• Investors have rather internalised that monetary policy will remain a stable and reliable source of support throughout the crisis.

Challenges for monetary policy

• The current situation also highlights the much broader challenges that monetary policy is facing today and that we will be discussing as part of our ongoing monetary policy strategy review.
• One relates to the transmission of monetary policy to the real economy in a low interest rate environment and in changing economic circumstances.
• Let me briefly illustrate these challenges without offering any definitive answers.

State- and time-contingent monetary policy transmission

• It depends, amongst other things, on the slope of the IS curve the curve that balances investments and savings.
• This slope may be different when interest rates are low, or when they have been low for a protracted period of time.
• [3] Academics and central bankers alike have focused on the slope of the Philips curve rather than the slope of the IS curve.
• A few studies suggest that monetary policy transmission may be non-linear in the level of the interest rate.
• [5] Before the pandemic, for example, we observed stagnation in households intentions to frontload major purchases (see left chart slide 8).
• These developments highlight that the strength of monetary policy transmission may depend not only on the interest rate level but also on the state of the economy.
• Such conditions may increase the lags with which policy actions are transmitted to the real economy.

Interaction between monetary policy and financial stability

• The second challenge that monetary policy is facing today relates to potential side effects, in particular related to financial stability.
• The pandemic highlighted that the interaction between monetary policy and financial stability is a two-way street.
• In the early phase of the crisis, forceful monetary policy action preserved financial stability.
• Our measures had a strong and immediately stabilising effect on both financial markets and the health and soundness of banks balance sheets.
• This is the essence of the GDP-at-risk approach, which acknowledges the non-linear relationship between financial conditions and future economic growth.
• Therefore, monetary policy cannot ignore financial stability risks.
• Empirical evidence suggests that monetary policy, too, has a significant and lasting impact on house prices in the euro area.

Conclusion

Access to finance for small and medium-sized enterprises since the financial crisis: evidence from survey data

Prepared by Katarzyna Bańkowska, Annalisa Ferrando and Juan Angel Garcia[1]

1 Introduction

• Moreover, firms across different countries and sectors faced the same issue.
• Monetary policy measures, including non-standard ones, have contributed to improving access to finance for euro area non-financial corporations since the GFC.
• While SMEs financing conditions have significantly improved over recent years, some important challenges remained even before the coronavirus (COVID-19) pandemic that started late in 2019.
• the difference between financial needs and the availability of external funding remained for specific financing instruments, notably the market-based ones.
• Diversification across alternative financing instruments can make an important contribution to resilience against adverse financial and real shocks.
• Also, a combination of leasing/factoring and short-term loans was of particular importance for SMEs, compared with larger firms.

2 Access to finance and credit rationing over time

• These phases have coincided with periods over which the monetary transmission mechanism was impaired to various degrees, negatively affecting SMEs financing conditions.
• Therefore, ECB measures taken to restore the transmission mechanism also had a positive impact on SMEs access to finance during those periods.
• The first phase covered the period from the launch of the survey in 2009, to September 2012, when the Outright Monetary Transactions (OMT) programme was announced.
• During this period, SMEs reported that access to finance ranked second, after finding customers, among the biggest obstacles to conducting business (see Chart 1).
• Since spring 2016, only about 8% of SMEs have reported access to external financing as their main concern, compared with nearly 20% in 2009.
• The percentage of firms that perceived access to finance as their main problem was consistently higher for SMEs than for large companies over the whole period concerned (see Chart 1).


Chart 2 Most significant problems faced by euro area SMEs across sectors (weighted percentages of respondents)

• [4] During the 2009-12 period, about 15% of euro area SMEs that regarded bank loans as relevant to their funding were constrained in obtaining a bank loan.
• In the second phase (until around March 2016), that percentage declined to approximately 12% and it has stabilised at around 8% in recent years (see Chart 3).
• The share of financially constrained firms varied by firm size, category and country.
• SMEs tended to more frequently report that they were financially constrained than large companies, although the percentages have declined over time (see Chart 3).
• those in business for ten years or more) tended to be considerably less financially constrained than young ones (existing for less than 10 years).
• Chart 3 Financially constrained firms by age and size (weighted percentages of respondents)
• For large firms, it is not only the degree of financial constraint that is less serious compared with SMEs, but also the form of the constraint.
• Large companies more often reported being quantity constrained (i.e.
• banks offering a limited amount of the requested credit) than SMEs, while outright rejections were much smaller for large firms compared with SMEs (see Chart 4).
• Bank credit costs appeared negligible in determining financial constraints for all companies, reflecting the significant extent of monetary policy accommodation since 2009.

3 Effects of unconventional monetary policy

• In response to the weak economic conditions prevailing in the euro area, several monetary policy stimulus measures have been introduced over recent years. These have included a series of unconventional monetary policy measures, with the aim of restoring the transmission mechanism of monetary policy and bringing inflation back to the ECB’s price stability objective in a sustained way. These measures worked through several different channels, with some of the measures proving particularly useful in mitigating banking sector problems, restoring bank lending dynamics and sustaining financing conditions in general.[8] In particular:[9]
  • The Outright Monetary Transactions (OMT) programme was launched in the summer of 2012. Once a programme is established by the European Stability Mechanism (ESM), the OMT programme enables the purchase of eligible sovereign bonds issued by euro area governments in order to address severe distortions in sovereign bond markets. While no purchase has yet been conducted under the OMT programme, its announcement helped to reduce the yields on sovereign bonds issued by fiscally-stressed countries immediately, sharply, and permanently.[10] Furthermore, by alleviating pressure on euro area banks holding such bonds, the announcement of the OMT programme helped to sustain lending.
  • Interest rates were lowered to negative territory in the summer of 2014, thus providing additional monetary stimulus.[11] Also, the ECB has repeatedly communicated its intention to keep short-term interest rates low for an extended period of time, with such forward guidance reinforcing the signalling channel of policy rate cuts.
  • The CSPP was first announced as part of a broader set of measures under the expanded APP in March 2016. It was launched in June 2016 to allow for large direct purchases of eligible (i.e. investment grade) bonds issued by companies based in the euro area.[12] The programme was aimed at reducing debt-financing costs for large firms which could issue such bonds as an alternative financing source to bank loans, thereby freeing up more loan supply for smaller firms.[13]
  • Several rounds of TLTROs were launched to further foster corporate lending. The amounts that credit institutions could borrow as part of these operations were linked to their eligible credit granted to euro area-resident non-financial corporations and households, excluding lending for house purchases, in all currencies. The first series of TLTROs (TLTRO I) was announced in June 2014 and implemented in September 2014. The second series (TLTRO II) was announced in March 2016 and implemented in June 2016. Finally, a third series of TLTROs (TLTRO III) was announced in March 2019 and implemented starting from September 2019.[14]

  
  All of these measures shaped euro area firms’ perceptions of the availability of external finance (see Charts 5 and 6). Chart 5 Availability of external financing instruments for SMEs (net percentages of respondents for which the respective instrument is relevant)
  Chart 6 Availability of external financing instruments for large firms (net percentages for which the respective instrument is relevant)

  • Against this background, the announcement of the OMT was specifically aimed at easing the financial market conditions in stressed countries and thereby indirectly improving access to finance in those countries.
  • [15] The programme represented a turning point in firms perceptions, a conclusion that is confirmed by econometric analysis.
  • [17] These rejections were influenced by the health of bank balance sheets, in particular by the presence of non-performing loans (NPLs).
  • This suggests that supply factors did play an important role in subdued credit in these countries.
  • Taken together, the above-mentioned empirical evidence lends support to the success of the ECBs UMP measures in improving the terms and conditions of bank credit to SMEs, consistent with the bank lending view of monetary policy transmission.
  • [19] Chart 7 Financially constrained SMEs in countries more affected by the debt crisis (weighted percentages of respondents)
  • [21] Access to other sources of finance beyond bank lending is also important for SMEs.
  • [22] Corporate bond purchases through the CSPP also contributed to an improvement in SMEs access to finance.
  • provide evidence for a funding expectations channel of monetary policy by looking at how SMEs decisions are affected by their expectations of future credit access.
  • [24] This funding expectations channel complemented the standard bank lending channel, under which monetary policy is transmitted to the real economy through changes in the level and composition of bank credit.
  • In particular, immediately after the policy announcements, expectations of future credit access improved relatively more for SMEs borrowing from banks that were expected to increase SME lending due to the policy measure.
  • Chart 8 UMP announcements and SMEs expectations of bank loan availability (net percentages of respondents for which bank loans are relevant)
  • Importantly, the reported evidence suggests that the non-standard measures worked through different channels and that their impact varied somewhat across countries.
  • In interpreting the results, it has to be kept in mind that isolating the effects of monetary policy is always challenging.
  • Furthermore, in the case of the research reviewed in this section, the non-standard nature of the measures for which a very limited number of episodes exists further complicates the identification process.

4 Financing patterns and financial behaviour

• Despite the improvement in financing conditions and the policy measures implemented so far, some structural challenges for SMEs access to finance remain.
• These challenges are mainly related to the fact that euro area firms still use a limited number of the available financing instruments.
• It represents a snapshot of the financing options chosen by euro area firms after the developments described in the previous section.
• The financing options of euro area enterprises are limited to a few instruments, mostly related to the banking sector.
• Chart 9 Use of financing sources for euro area firms (weighted percentages over the period 2009-19)
• Chart 10 shows the distribution of the number of financing sources used by SMEs and by large enterprises.
• As predicted by the literature[26], the data show the limited diversification of financing sources of SMEs in contrast to large enterprises.
• When looking at firms using four or more financing sources, the percentage of large enterprises is almost twice as high as for SMEs.
• In order to establish a taxonomy of financing patterns, firms in the SAFE sample are grouped on the basis of their sources of finance using a cluster analysis.
• The taxonomy provides a snapshot of the financing behaviour of euro area firms until the period just before the coronavirus crisis.
• While the approach is by its nature related to a specific period, the analysis of survey replies in alternative periods, for instance April-September 2012, shows that firms displayed broadly similar financing patterns.
• By contrast, SMEs tend to more often be in the clusters where flexible short-term debt or long-term bank loans are the main financing instruments.
• Box 1 A taxonomy of financing patterns in the euro area: a cluster analysis approach Prepared by A. Ferrando and K. Bakowska The empirical analysis used to identify financing patterns for euro area enterprises is based on a cluster analysis approach similar to the research carried out by Moritz et al.
• Being solely based on one round, the taxonomy provides a snapshot of the financing behaviour of euro area firms.
• The different clusters are presented by starting with those that include several financing instruments, and moving towards clusters that use fewer financing options.
• Cluster 8 (no external financing): The last cluster is the largest one, covering 38% of the total sample of firms.


Table 1 Cluster comparison according to firm characteristics

• Beyond these financing sources, vulnerable firms were more likely to receive funds through grants or subsidised bank loans.
• By contrast, a high share of profitable firms was in the cluster no external financing, probably because they have high retained earnings.
• They were more often using a variety of financial instruments, including market-based ones (mixed grants cluster).
• Industrial firms were slightly more often in the cluster with more diversified financing options (mixed market cluster).
• Overall, they are able to attract debt and long-term financing, given their ability to provide collateral to secure their debt.
• Finally, firms in the services sector are less likely to use external financing instruments compared with firms in the other industries, with many being in the cluster related to asset-backed financing (mixed leasing/factoring).
• An important indicator derived from the SAFE dataset is the degree of financing gap, defined as the difference between the change in demand and in the availability of external financing.

5 Real effects of financing patterns

• In the SAFE survey, firms are asked about the use of both external and internal financing.
• Firms mainly use their external financing for fixed investment and working capital financing.
• [31] First, firms investing in fixed assets use several financing instruments, mostly consisting in banking products.
• More than 60% of firms in the clusters with more financing options (mixed grants, mixed market and mainly bank loans) use finance for fixed investment.
• Fourth, firms developing and launching new products or services tend to use a variety of financing products.
• Chart 12 Purpose of financing as perceived by firms across financing clusters (percentages)
• To further investigate the link between financing options and firms decisions in the real economy, a logistic regression model is run.
• Table 2 reports the effects of the diversification of external funds by clusters on the purposes for which firms used financing.
• [33] Focusing on the highest marginal effects, the results show that firms using more grants or long-term bank loans (i.e.
• Also, the probability of a firm investing in working capital is 26% higher for firms in the trade credit financing cluster.
• Table 2 Purposes of financing and diversification of financing instruments (marginal effects)

6 Conclusions

• The analysis highlights some important effects of monetary policy decisions on SMEs’ access to finance over recent years.
  • First, monetary policy measures predominantly aimed at supporting bank credit are crucial for SMEs in the light of their dependence on bank credit as the main source of external finance.
  • Second, support for bank finance is particularly relevant for the funding of fixed investment by SMEs, which may play an important role in the transmission of monetary policy.
  • Third, from a structural point of view, initiatives taken at the EU or national levels to support access to market-based instruments are of the utmost importance. A diversification in sources of finance would facilitate the activity and the expansion of innovative firms in particular, while also generally making SMEs more resilient in situations where the supply of credit tends to dry up.

• PRESS RELEASE

  ECB takes note of German Federal Constitutional Court ruling and remains fully committed to its mandate

  5 May 2020

  The Governing Council received a preliminary briefing by the governor of the Bundesbank and by the legal department of the European Central Bank (ECB).

• The ECB takes note of todays judgment by the German Federal Constitutional Court regarding the Public Sector Purchase Programme (PSPP).
• The Court of Justice of the European Union ruled in December 2018 that the ECB is acting within its price stability mandate.
• For media queries, please contact Peter Ehrlich, tel.