How Balance sheets of ECB, Fed and BoE have changed during the crisis?

This is an amazing note from Jean Pisani-Ferry and Guntram Wolff  of Bruegel. All central bank guys should be attempting to write something like this.

The note centres around how ECB’s LTRO has impacted/not impacted the Eurozone. But in the process, they explain the balance sheets of the three major central banks to help understand the diffeernces. What is even better is they have explained each item on the assets side of the balance sheet of all these three CBs.

This Policy Contribution provides a detailed assessment of the effectiveness of the LTROs. We compare the different steps taken to address the crisis by the Bank of England, the Federal Reserve and the ECB, and consider if the three-year LTRO is having macroeconomic effects. Since 2009, the  Bank of England and the Fed have mostlyresponded by purchasing government bonds. This quantitative easing has been done with the clearly stated aim of supporting the macroeconomy, as the traditional response of lowering the interest rate was constrained by the short-term interest rate’s zero lower bound. The ECB has also relied on government bond purchases. These, however, have been much more limited and have been done with the stated aim of improving the monetary transmission mechanism, not with the aim of improving credit conditions. The ECB, instead, has relied more on its traditional monetary policy instruments, namely repos. Although the increase in the overall balance sheet size of all three central banks is by now similar in size, their composition therefore differs significantly.


As all central banks follow different frameworks things vary. Repos is conventional for ECB as it forms a regular part of their policy. However, OMO (Open Market Operations) is conventional for Fed but Repo isn’t really used. Hence, ECB is more reluctant to use buying bonds like Fed and BoE and has preferred to just use LTRO.

Expressions used since the beginning of the crisis to characterise the central banks’ extraordinary actions are confusing: ‘unconventional policies’, ‘quantitative easing’, ‘qualitative easing’, ‘credit easing’ are often used as if they were interchangeable, or at least little distinguishable. Central bank actions can be categorised on the basis of three criteria:

Whether they involve a departure from the open market operations routinely conducted by the central bank. This is a matter of procedures and the reference is past behaviour. According to this criterion a central bank’s operation could be unconventional because it departs from standard practice, whereas the same operation might corresponds to standard practice for another standard bank and therefore not be unconventional. For example, the use of repos was unconventional for the Fed in 2008-09, but not for the ECB.

Whether they involve intervention in particular market segments, eg credit markets or the  government bond market. This is a matter of targeting of the central bank intervention.

Whether they result in an increase in the central bank’s balance sheet. This is a matter of monetary impact.

The paper then goes on to compare the three balance sheets and saying how ECB has been different. As far at LTRO has concerned, it has helped the banking system but not much to the economy. The purpose of LTRO was to help banks where as QE was designed to lower interest rates and help economy.

The ECB has, with the recent LTROs, managed a massive expansion of its balance sheet. This has been called the euro-area equivalent of quantitative easing, as done by the Fed and the Bank of England. Large portions of this liquidity, however, are parked in overnight deposits at the ECB, reducing its effectiveness for the overall monetary policy stance.

The main obstacle for the ECB is not the fact that the Treaty on which it is based places tight limits on the purchase of government bonds, compared to those existing in the UK and the US. Rather, the absence of a banking and fiscal union and the strong heterogeneity within the euro area reduces the effectiveness of the instruments the ECB has. The absence of a common euro-area reference asset precludes the ECB from exercising a direct influence over the benchmark yield curve. The combination of sovereign and banking fragility, in turn, means that additional liquidity provided to the banks in the euro area will be used to smooth the effect of the exit of private funding and the selective buying of government bonds by banks, which in turn increases fragility. 

So structural reforms are clearly needed:

The three-year LTRO has been an appropriate response to a situation of extreme stress among European financial institutions. As long as the crisis of confidence continues, however, there are inherent limits to the LTRO’s effectiveness. Additional ECB liquidity will not improve credit conditions in countries under stress. ECB policy is rendered less effective by the heterogeneity across countries and the incomplete fiscal set-up. The ECB therefore rightly calls for a stronger fiscal union.

Very useful. This read along with Eurosystem accounts primer is really helpful.

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