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Short vs. Long-term
investments - What will capital
markets deliver?
An ECB Market Operations
perspective
ECMI, 23 November 2017
Brussels
ECB - public
Ulrich Bindseil
DG Market Operations
ECB
(Views expressed in this
presentation are not
necessarily the ones of
the ECB)
ECB Public
Rubric
www.ecb.europa.eu © 2
The maturity and liquidity transformation problem
Q2, 2017 In trillion of EUR
HH NFCs Publ sect Fin Corp Total
Assets 55 40 13 77 186
Financial assets 23 23 5 77 128
Real assets 32 17 8 1 58
Financial Liabilities 7 33 13 75 128
Net worth 48 8 1 2 58
(Net financial position ROW: 0.4 billion liability)
• Euro area: EUR 58 trillion of real assets; EUR 33 billion are financed
• Financial assets = financial liabilities = EUR 128 trillion
Rubric
www.ecb.europa.eu ©
Real assets in economic projects are illiquid and depreciate over many years: The real
sectors, in particular NFCs (also governments; households as mortgage borrowers)
want to run only a limited duration mismatch and take only limited liquidity risks.
Household want to hold (besides their pension savings) assets which are liquid and
have little (ideally no) market and liquidity risks.
The financial system aims at delivering required transformation:
– Pension/insurance: offer products with high long-term expected return, low risk
– Banks deliver maturity and liquidity transformation
– Capital markets aim at (long term) transparent and liquid funding instruments
Delivering financial transformation is risky => Regulation wants to reduce systemic
risks, while not unduly preventing maturity/liquidity transformation at benefit of society.
• Importance of efficient capital markets to:
– Realise growth potential of the euro area economy;
– Contribute to financial sustainability
– Foster diversity of founding opportunities for corporates;
– Provide attractive financial investments
– Support transmission of monetary policy
3
The maturity and liquidity transformation problem
Rubric
www.ecb.europa.eu ©
• Asset and funding liquidity are essential in determining the
ability of the financial system to intermediate and to provide
liquidity and maturity transformation
• CB collateral framework and way banks can access central
bank credit is important to asset and funding liquidity;
• Asset purchase programme, if in place, will impact on asset
price behaviour and liquidity. By exchanging long duration,
imperfectly liquid and somewhat credit risky assets against
risk free and perfectly liquid ones, it cheapens funding of real
economy and stimulates (long term) investment
• If implemented unfavourably, central bank operations could
however also distort markets, create volatility, impair liquidity
4
ECB market operations perspective
The role of efficient capital markets – an ECB perspective
Rubric
www.ecb.europa.eu ©
• Eurosystem collateral framework allows banks to convert eligible
securities into central bank money and has played a key role
– protecting Eurosystem from losses
– in implementation of monetary policy since 1999, and
– in stabilising financial markets and institutions during financial crisis
• How the Eurosystem collateral framework has been designed with the aim
also to support the efficient functioning of financial markets is explained in:
• http://www.ecb.europa.eu/pub/pdf/scpops/ecb.op189.en.pdf
A model how central bank credit operations and the collateral framework
impact on ability of the banking system to undertake maturity
transformation, and what role asset liquidity plays, is explained further in:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3049792
5
The ECB collateral framework and its impact on capital markets…
Rubric
www.ecb.europa.eu ©
Eligible and non-eligible capital market instruments
6
Source: ECB;
Universe of eligible marketable assets as of 31 October 2017
Hybrid debt includes convertible bonds, contingent convertible bonds and bonds with warrants attached.
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
ABS Central/Reg.Government
CorporateBonds
Covered BankBonds
UncoveredBank Bonds
Hybrid Debt Equity Funds
Eligible and non eligible marketable assets issued by euro area issuers (EUR million)
Eligible assets (NVO) Non eligible assets (NVO)
Rubric
www.ecb.europa.eu ©
• APP (“QE”) a non-conventional monetary policy tool activated
to achieve price stability mandate in a context of:– Short term interest rates (the standard monetary policy tool) constrained
by effective lower bound to interest rates;
– Low natural interest rates (“low r*”) due to low potential growth and debt
overhang issues from financial crisis that are only gradually repaired.
• Without forceful easing measures (APP, TLTRO, NIRP),
(expected) inflation was expected to decine further, implying
risk ineffectiveness of monetary policy
• Eurosystem was successful in preventing this
• For more than three years: growth > potential growth =>
output gap closing; downward trend of inflation reversed;
unemployment falling; debt overhang issues gradually
addressed
7
The role of the Eurosystem asset purchase program
Rubric
www.ecb.europa.eu ©
ABSPP CBPP3 CSPP
Objectives /
motivation
• provide credit to real economy;
• help lenders diversify funding
• Contribute to revitalisation of a
sustainable securitisation in
euro area
• facilitate credit provision by
banks to the real economy
• support financing conditions
in the euro area
• strengthen pass-through of
Eurosystem’s APP to financing
conditions of real economy;
• provide further monetary policy
accommodation
Eligible UniverseMon. pol. eligible ABS (subject to
DD assessment)
Mon. pol. eligible CBs for own
use & multi-cédulas
Non-financial and financial
corporate securities (excluding
unsecured bank bonds)
Minimum rating CQS3 CQS3 CQS3
Maturity All All 6 months – 30 years
Issue Limit 70%* 70%*/** 33%/70%*/**
Issuer limit No Yes** Yes*
Purchases1ary & 2ary
market
1ary & 2ary
market
1ary & 2ary market
(no 1ary for public sector
corporates)
Implementation 6 NCBs NCBs and ECB 6 NCBs
Securities lending Authorised Yes Yes
8
* Specific conditions for programme countries apply
** Combined Eurosystem holdings from monetary policy and investment portfolios
Experience of the private sector parts of the APP
Rubric
www.ecb.europa.eu ©
Development of APP purchases
9
ECB-CONFIDENTIAL
Source: ECB
*Note: at amortised cost
Breakdown of total holdings as of 31 October 2017APP monthly net purchases by programme
Total holdings: €2,180 trn*
82%
11%
1% 6%
PSPP
CBPP3
ABSPP
CSPP
0
10
20
30
40
50
60
70
80
90
Oct
No
vD
ec
Jan
Feb
Ma
rA
pr
Ma
yJun
Jul
Aug
Sep
Oct
No
vD
ec
Jan
Feb
Ma
rA
pr
Ma
yJun
Jul
Aug
Sep
Oct
No
vD
ec
Jan
Feb
Ma
rA
pr
Ma
yJun
Jul
Aug
Sep
Oct
2014 2015 2016 2017
EUR bnPSPP CBPP3 ABSPP CSPP Average
Experience of the private sector parts of the APP: contribution to APP
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: Review
10
public
Since the start of the private sector purchase programmes, several positive
developments can be highlighted:
1. Broad based spread tightening….
CBPP3Announceme
nt
Start purchases
-50
0
50
100
150
200
Jan-1
4
Jun-1
4
No
v-1
4
Apr-
15
Sep-1
5
Feb
-16
Jul-1
6
De
c-1
6
Ma
y-1
7
Oct-
17
bps ES DE IT FR
Sources and notes: iBoxx indices. Last observation: 08 November
2017.
Covered bond asset swap spreads, per selected
jurisdiction ABS spread* developments
Sources: JP Morgan, Deutsche Bank Research and ECB calculations.
*Note: Most spreads are over 3-month Euribor. Rating at issuance.
Last observation: 10 November 2017.
0
50
100
150
200
250
300
350
400
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
NL IE ES-ECB elig.
IT-ECB elig. PT-ECB elig. Auto ABS
PT ES IT
ABSPP
announcement
Start of purchases
bps
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: Review
11
public
…. with spill overs to non-eligible fixed income securities
Sources and notes: ICE BAML EUR corporate bond index, ECB calculations.
Last observation: 09 November 2017.
Investment grade corporate bond z-spreads of CSPP
eligible and non-eligible bondsCorporate bond spreads in EUR denominated
investment grade vs high yield sector
0
50
100
150
200
250
Jan-1
6
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Sep-1
6
No
v-1
6
Jan-1
7
Ma
r-1
7
Ma
y-1
7
Jul-1
7
Sep-1
7
No
v-1
7
z-spreadCSPP eligible CSPP ineligible
Start of purchases
CSPP announcement
Sources and notes: ICE BAML EUR corporate bond index, ECB calculations.
Last observation: 09 November 2017.
0
100
200
300
400
500
600
700
800
Jan-1
6
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Sep-1
6
No
v-1
6
Jan-1
7
Ma
r-1
7
Ma
y-1
7
Jul-1
7
Sep-1
7
No
v-1
7
CSPP announcement
Start of purchases
EUR IG EUR HY
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: Review
12
public
2. Issuance remained healthy or even picked up…
0
20
40
60
80
100
120
2013 2014 2015 2016 2017 (YTD)
AT, BE, DE, FI, FR, NLES, IE, IT, PT
Covered bond issuance volumes
Source: Dealogic, ECB calculations. EUR-denominated benchmark size
primary market issuances. Last observation: 10 November 2017.
CBPP3
started in
Oct 2014
EUR bn
0
20
40
60
80
100
120
140
2013 2013 2014 2014 2015 2015 2016 2016 2017 2017
ES, IE, IT, PT, distributed BE, DE, FR, NL, distributed
ES, IE, IT, PT, retained BE, DE, FR, NL, retained
2015 2016 2017(YTD)20142013
Sources: JP Morgan and ECB calculation.
Last observation: 10 November 2017.
EUR bn
Asset-backed securities issuance volumes
ABSPP
started in
Nov 2014
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: Review
13
public
… however it is not yet evident that new or infrequent issuers are more
active these days
Corporate bond issuance volumes
CSPP
started in
Jun 2016
0
20
40
60
80
100
120
140
160
180
200
2013 2014 2015 2016 2017 (YTD)
EUR bn
Sources: Dealogic, ECB calculations. EUR-denominated, investment grade
primary market issuances. Last observation: 10 November 2017.
CSPP
started in
Jun 2016
0
5
10
15
20
25
30
35
40
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17*
EUR bn
Sources: Dealogic, ECB calculations. Data include all rated and non-rated euro
area non-financial companies issuing in euro. Last observation: 10 November 2017.
CSPP
started in
Jun 2016
Bond issuance by infrequent euro area non-financial
corporate bond issuers
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: Review
14
public
3. Liquidity picture is different across market segments
0
20
40
60
80
100
120
140
160
1 2 3 4 5 6 8 9
10
11
12
14
15
16
17
18
20
21
22
23
24
26
27
28
29
30
31
33
34
35
Index CSPP CBPP3 ABSPP
Development of the average trade size (Indexed to 100 at the beginning of each programme)
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: CSPP
15
public
Lessons learned from CSPP:
Keep flexibility at the heart of implementation by adapting purchases to market
conditions…
6.2 6.3 6.2
7.9 7.4 7.1
3.1
7.0 7.2 6.76.0 5.8 6.1
3.94.5
6.4 6.3
0.20.5 0.5
1.9
1.01.9
0.8
1.50.7
1.5
0.8
1.8
0.7
1.7
0.2
1.3
0.7
0
2
4
6
8
10
12
EUR bnSecondary market purchases Primary market purchases
Sources: ECB Staff Calculations. Last observation: 31 October 2017
Data refers to net purchases..
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: CSPP
16
public
Lessons learned from CSPP:
…and not aiming for a one to one replication of benchmark, rather keep market
neutrality as a key feature
0%
5%
10%
15%
20%
25%
30%
35%
40%
20172016201520142013201220112010<2010
CSPP-eligible bond universe CSPP holdings
Sources: ECB, Bloomberg. Distribution based on nominal amounts.
Last observation: 9 November 2017.
CSPP holdings according to the year of
issuance of the bonds
29% 32%
25%25%
11%12%
11%10%
6% 5%
11% 11%
7% 5%
0%
20%
40%
60%
80%
100%
holdings universe
FR
DE
IT
ES
NL
other (euro area)
other (non-euro area)
43%
45%
24%
21%
17%
17%
9% 9%
7% 8%
holdings universe
Infrastructure and comm.
Consumer
Industry and resources
Real estate and Insurance
Other sectors
10%
11%
41%
43%
49%
45%
holdings universe
AA
A
BBB
Country, sector and rating classification of CSPP holdings and CSPP-eligible bond universe
Sources: ECB, Bloomberg. Distribution based on nominal amounts.
CSPP holdings as of end of Q3 2017.
Rubric
www.ecb.europa.eu © 17
Experience of the private sector parts of the APP: CBPP3
Lessons learned from CBPP3:
Adapt purchases across time, including to primary market activity …
0
2
4
6
8
10
12
14
Oct-
14
Nov-1
4
Dec-1
4
Ja
n-1
5
Fe
b-1
5
Ma
r-15
Apr-
15
Ma
y-1
5
Ju
n-1
5
Ju
l-1
5
Aug
-15
Sep
-15
Oct-
15
Nov-1
5
Dec-1
5
Ja
n-1
6
Fe
b-1
6
Ma
r-16
Apr-
16
Ma
y-1
6
Ju
n-1
6
Ju
l-1
6
Aug
-16
Sep
-16
Oct-
16
Nov-1
6
Dec-1
6
Ja
n-1
7
Fe
b-1
7
Ma
r-17
Apr-
17
Ma
y-1
7
Ju
n-1
7
Ju
l-1
7
Aug
-17
Sep
-17
Oct-
17
EUR bnSecondary market purchases Primary market purchases
Sources : ECB. Purchases at amortised cost in EUR billion. Secondary market figures reported net of redemptions. Last observation 31 October 2017.
Data refers to net purchases.
public
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: ABSPP
18
public
0
5
10
15
20
25
30
No
v-1
4D
ec-1
4Jan-1
5F
eb
-15
Ma
r-1
5A
pr-
15
Ma
y-1
5Jun-1
5Jul-1
5A
ug-1
5S
ep-1
5O
ct-
15
No
v-1
5D
ec-1
5Jan-1
6F
eb
-16
Ma
r-1
6A
pr-
16
Ma
y-1
6Jun-1
6Jul-1
6A
ug-1
6S
ep-1
6O
ct-
16
No
v-1
6D
ec-1
6Jan-1
7F
eb
-17
Ma
r-1
7A
pr-
17
Ma
y-1
7Jun-1
7Jul-1
7A
ug-1
7S
ep-1
7O
ct-
17
EUR bnSecondary market holdings Primary market holdings
ABSPP – Cumulative net purchases* in
primary and secondary market
Sources : ECB website. End of month book value at amortised cost, in EUR
billion. Previous month's figures subject to revision. Figures reported net of
redemptions.
Lessons learned from ABSPP: Net purchases are increasing at slower pace due
to redemptions, leading to a higher share of primary market transactions
-20
-10
0
10
20
30
40
50
EUR bn
EU
R b
n
Gross purchases Redemptions Net purchases
ABSPP – Cumulative purchases and redemptions
Sources: Intex and ECB calculations.
Last observation: 10 November 2017.
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: ABSPP
19
public
Euro area ABS new issuance since the start of the programme
• EU ABS issuance remains at low levels, at about EUR 35 bn/year, but:
• good investor demand in recent issuances
• more broad-based issuance by jurisdictions and originators:• two Portuguese SME ABS and one Auto ABS
• broad-based issuance in Italy in terms of type of ABS, incl. RMBS and SME ABS
• some revitalisation in Spain, with some Auto ABS and RMBS
• consolidation/regular issuance in Netherlands (RMBS) and Germany (Auto ABS)
• first public RMBS issuances in Ireland & France since the financial crisis
• Final ABS regulatory framework on STS (simple, transparent and standardised)
and amended capital requirements regulation (CRR) voted in October 2017.
Legislation enter into force in Q1 2018; will apply Jan 2019 => Part of CMU
42%
3%
10%
2%
41%
2%
AUTOCREDIT CARDCONSUMERLEASINGRMBSSME
1%
31%
8%
2%12%
3%
13%
29%
1%
BEDEESFIFRIEITNLPT
Rubric
www.ecb.europa.eu ©
Experience of the private sector parts of the APP: Review
20
public
4. Evidence of easing in credit conditions
-5
0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
loans to NFCs long-term debt issued by NFCs
Sources of financing for euro area non-financial companies (NFCs)
(y-o-y growth, %)
Source: ECB
Note: The data include debt issuance and loans denominated in euro to all euro area NFCs covered by the ECB securities statistics and statistics from MFIs
(monetary financing institutions). Last observation: September 2017.
Rubric
www.ecb.europa.eu ©
1) Key interest rates unchanged [“will remain at their present levels for an
extended period of time…”]
– MRO at 0.00%; MLF at 0.25%; DFR at -0.40%
2) APP will continue until end Sep 2018 [“or beyond, if necessary…”] at a
monthly pace of EUR 30 bn from January 2018
3) Reinvestment of the principal payments from maturing securities
purchased under the APP will continue after the end of net asset purchases
4) Private sector programs will remain “sizable”
5) Reinvestment modalities in net purchase phase: PSPP: same jurisdiction;
private sector programs: flexible
6) FRFA procedure extended for MRO and 3-month LTRO. At least until
the end of the last reserve maintenance period of 2019.
21
Latest ECB monetary policy decisions
Euro area monetary policy decisions at 26 October 2017 meeting ECB-UNRESTRICTED
Rubric
www.ecb.europa.eu ©
APP redemptions profile and reinvestment policy
• Projected APP redemptions
surpass EUR 100 bn in 2018;
ECB started publishing estimated
APP redemptions data over rolling
12-month horizon.
• Eurosystem will continue
reinvesting maturing securities
purchased under APP for extended
period of time after net purchases
=> absence of cliff effects
• Therefore, no particular volatility
expected looking forward relating to
APP path
• But of course factors causing
volatility in past may apply again
1. APP redemptions
22
0
5
10
15
20
25
EUR bn PSPP CSPP CBPP3 ABSPP
Projected redemptions
APP past and projected redemptions for 12 months
ECB-UNRESTRICTED
Source: ECB.
Realised redemptions