Current challenges for the ECB

1. Current challenges for the ECB Benoît Cœuré Member of the Executive Board European Central Bank Association des journalistes économiques et financiers Paris, 5 April 2013

2. Conjunctural developments

3. Euro area real GDP and survey data (A) quarter-on-quarter growth rate, contributions (B) year-on-year growth rate, diffusion index, percentage balance) Sources: Markit, DG-ECFIN and Eurostat. Latest data: 2012Q4 for GDP, March 2013 for the ESI and the PMI.

4. Euro area divergence Real GDP (index: 2009Q2 = 100) Economic Sentiment Index (index: March 2009 = 100) Sources: DG-ECFIN, Eurostat and ECB calculations. Latest data: 2012Q4 for GDP, March 2013 for the ESI. Note: Stressed countries refer to GR, ES, IE, IT, PT, CY & SI.

5. Developments in euro area labour markets Euro area employment, PMI employment expectations and unemployment (q-o-q % growth; index; % of labour force) Sources: Eurostat and Markit. Note: The PMI is expressed as deviations from 50 divided by 10. Latest data: 2012Q4 for employment, February 2013 for unemployment and March 2013 for the PMI.

6. Latest euro area real GDP growth forecasts (annual percentage change)

7. HICP and HICP excluding food, energy and taxes (annual percentage changes) Sources: Eurostat and ECB calculations. Note: Latest observations: March 2013 for HICP and HICP excluding food and energy (Flash estimates). January 2013 for HICP excluding food, energy and taxes. Projection ranges for 2013 and 2014 refer to the March 2013 MPE . Projections for HICP excluding energy, food and taxes are not available.

8. The price of deflation and inflation protection remain below the 5-year average Price of floor and caps (year-on-year) on euro area HICP inflation – 5Y maturity Sources: Bloomberg. Latest observation: 03 April 13 Note: The market for inflation-linked options is relatively illiquid and often heavily influenced by specific demand and supply patterns. Developments should therefore be interpreted with caution. The underlying instruments are for the inflation protection: year-on-year cap of 4% with 5 year maturity; for deflation protection: year-on-year floor of 0% with 5 year maturity.

9. Latest euro area HICP forecasts (annual percentage change)

10. The ECB monetary policy

11. In exceptional circumstances, the ECB took exceptional monetary policy measures, with a separation between: Standard measures: Reduction in all key ECB interest rates Non-standard measures: to support the effective transmission of interest rate decisions to the wider euro area economy, in a context of dysfunctions in the financial market Price stability objective has retained primacy in all these measures Overview of the ECB’s monetary policy in the crisis

12. ECB’s interest rate decisions and implementation:steering money market conditions As a result of the monetary policy operations, the overnight interest rates evolve in relation to the key ECB interest rates Sources: ECB Last observations: 2 April 2013.

13. Overview of non-standard monetary policy actions • Measures to improve bank funding and liquidity conditions • Fixed-rate full allotment mode in refinancing operations (since October 2008) • Lengthening the maturity of the refinancing operations (1, 3, 6, 12 and 36 months) • Extending the list of eligible collateral • Liquidity provision directly in foreign currencies (USD and CHF) • Reducing reserve requirements (from 2% to 1%) • Measures to provide depth and liquidity in malfunctioning markets • A. Covered bond markets • Covered Bond Purchase Programmes (July 2009 - July 2010; Nov. 2011-Oct. 2012) • B. Sovereign bond markets • Securities Markets Programme (May 2010 to 6 September 2012) • Outright Monetary Transactions (modalities announced on 6 September 2012)

14. How non-standard measures are reflected in the ECB’s balance sheet… Eurosystem monetary policy operations in euro Source: ECB. Last observation: 2 April 2013.

15. Relationship between EONIA and excess liquidity Source: ECB. Sample period: May 2009 to April 2013

16. Indicator of cost of borrowing for non-financial corporations Short-term (percentages per annum; three-month moving average; March 2003 to January 2013) Long-term (percentages per annum; three-month moving average; March 2003 to January 2013) Sources: ECB, ECB calculations. Notes: The indicator is computed using lending rates on loans with a maturity of up to one year and interest rates on overdrafts, aggregated on the basis of amounts outstanding. The weight applied to lending rates on loans with a maturity of up to one year accounts for the share of long-term loans issued at a floating rate. Sources: ECB, ECB calculations. Notes: Long-term lending rates on loans with a maturity of more than one year. Aggregation is based on new business volumes. 16

17. Indicator of cost of borrowing for households Short-term (percentages per annum; three-month moving average; March 2003 to January 2013) Long-term (percentages per annum; three-month moving average; March 2003 to January 2013) Sources: ECB, ECB calculations. Notes: Lending rate to households for house purchase, up to one year maturity. Aggregation is based on new business volumes. Sources: ECB, ECB calculations. Notes: Long-term lending rates on loans with a maturity of more than one year. Aggregation is based on new business volumes. 17

18. Risk control measures

19. Risks in Eurosystem credit operations • The risk management framework enables the central banks to provide support to the economy by optimising the relationship between policy efficiency and risk taking • Risks are constantly monitored and assessed against available financial buffers at the Eurosystem level

20. Non-standard monetary policy measures (purchases) Monetary policy portfolios SMP (as of 31 December 2012) CBPP (EUR 47.3 billion as of 2 April 2013 – settled amount) CBPP2 (EUR 16.2 billion as of 2 April 2013 – settled amount) The financial risks are closely monitored and measured

21. Non-standard monetary policy measures (credit operations) • Provision of unlimited liquidity at various maturities • Measures to increase collateral availability Key principles of the risk control framework • Risk protection • Consistency • Simplicity and transparency • Risk equivalence (residual risk of assets - after valuation and haircuts- same for all collateral types)

22. Changes to the risk control framework following non-standard measures The Eurosystem reviewed its risk control measures together with decisions to preserve collateral availability for counterparties during 2012: • when euro area NCBs have been allowed on 9 February to accept as collateral additional performing credit claims; • when reducing the rating threshold and amending the eligibility requirements for certain ABSs on 29 June; • on 6 September when the marketable debt instruments denominated in currencies other than the euro (USD, GBP, JPY) issued and held in the EA became eligible; • on 19 December when eligibility of debt instruments issued or guaranteed by the Hellenic Republic was reinstated (the application of the minimum credit rating threshold was suspended on 6 September in the case of assets issued or guaranteed by OMT or EU/IMF programme-complying countries);

23. Collateral put forward in Eurosystem credit operations by asset group (percentages; annual averages)

24. Risk mitigation framework for Eurosystem credit operations (1) • Counterparties must be financially sound; • According to Article 18.1 of the Statute of the ESCB, all credit shall be based on adequate collateral; • Collateral alone cannot eliminate or even sufficiently mitigate financial risks; there are two possibilities of loss, once a counterparty defaults: • A “double default event”: Very small probability as long as: (a) collateral satisfies high credit standards; and (b) close financial links between counterparty and collateral issuer are prohibited; • Losses incurred in realising collateral in illiquid market conditions: Use correct valuation and risk control measures to keep probability of such losses small.

25. Risk mitigation framework for Eurosystem credit operations (2) To guarantee that the quality and quantity of collateral provide adequate protection to the Eurosystem, three risk mitigation tools are required: Risk mitigation within the collateral framework Eurosystem Credit Assessment Framework (ECAF) Collateral valuation Risk control measures

26. The Single Supervisory Mechanism

27. The Single Supervisory Mechanism (SSM) • Establishment of the SSM • Need to speed up strengthening of Economic and Monetary Union (EMU) because of: • Sovereign debt crisis • Contagion in the banking sector • Milestones of the process in 2012 and in 2013 • 29 June: Euro area Summit – Request to set up a single supervisory mechanism (SSM) • 12 September: European Commission proposal for a Council Regulation • 18 October: European Council conclusions on completing EMU • 13 December: European Council agreement on SSM • 19 March 2013: Provisional agreement on SSM between European Council and European Parliament

28. The Single Supervisory Mechanism (SSM) • Two main advantages and goals of establishing the SSM • Will address the so-called “financial trilemma” • Impossibility of achieving financial stability, financial integration and maintaining national financial policies in a globalised financial market • Together with a single resolution mechanism, will help to break the negative feedback loops between sovereigns and banks • Increasing debt levels of sovereigns that provided financial support to struggling banks • Losses for banks from exposures to sovereigns under stress • Break the correlation between the cost of funding of euro area banks and that of their respective sovereigns • Need for a common resolution mechanism

29. The Single Supervisory Mechanism (SSM) • Main features of the SSM • Single system of supervision • The ECB will take all decisions regarding the banks, banking groups and respective components categorised as “significant” (around 150 banks in the euro area countries) • Banks with more than €30 billion in total assets • Banks representing more than 20% of domestic GDP (unless <€5 billion in assets) • 3 most significant banks in each country (unless justified by particular circumstances) • Banks receiving direct assistance from the EFSF/ESM • The ECB can decide to exercise direct supervision of other banks

30. The Single Supervisory Mechanism (SSM) • Main features of the SSM (cont.) • The national supervisors will take the decisions regarding “non-significant” banks subject to regulations, guidelines or general instructions • Close cooperation with non-euro area Member States • The ECB can conduct supervision in a non-euro area EU Member State, following a request for close cooperation • Transition • The SSM will start supervision one year after the entry into force of the regulation • ECB may choose to postpone the start if it deems that it is not ready

31. The Single Supervisory Mechanism (SSM) • ECB’s guiding principles for establishing the SSM • Comprehensiveness and strong institutional framework • Independence • Clear separation of monetary policy and supervisory responsibilities • Decentralisation • Consistency with the single market • Accountability

32. The Single Supervisory Mechanism (SSM) • Establishment of a banking union • “Towards a genuine Economic and Monetary Union” Final Report by the President of the European Council (December 2012) • Core elements of a banking union: • A Single Supervisory Mechanism (SSM) consisting of the ECB and national supervisors • A single bank resolution mechanism, including an independent resolution authority and a European resolution fund • More harmonised and sufficiently robust deposit-guarantee mechanisms in the EU

33. Thank you for your attention