Central Banking 101: the EONIA heartbeat | 178 comments (178 topical, editorial, 0 hidden)

Re: Central Banking 101: the EONIA heartbeat (none / 1)

In that interpretation it's not that the change to unlimited tender led to the decoupling of EONIA from the policy rate. It is that the decoupling of EONIA from the policy rate coincided with the change, because they were both caused by the financial crisis. In this interpretation, the month between the start of the ECB sterilisation programme and the EONIA cardiac arrest would correspond to the time it took to drain excess liquidity from the subset of banks that both trust each other and have liquidity to spare.

Well, that's a testable hypothesis, if we know the volume that underlies the EONIA. If the above interpretation is true, it requires the total volume (pre-sterilisation ) on the EONIA to be roughly in the same ballpark as a month's worth of sterilisation effort. It would also predict that volume should fall off a cliff once the ECB starts sterilising, and become statistically indistinguishable from nothing by the time the sterilisation effort starts running into trouble.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 26th, 2011 at 06:42:37 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

The connection with banking sector segmentation may be given by the following from last week's thread:

Looking into this I found the following from last September (with my emphasis):
But the two-pronged approach, while messy, could work. If unlimited cash was available only in one-week rather than three-month portions by then, the ECB would still get the normal impact from a rate hike.
"If you wanted to continue providing unlimited liquidity while raising interest rates, the system in Europe would in many ways facilitate that quite easily," said Societe Generale economist James Nixon.
"The impact of a 25 basis point hike would be exactly the same. It would just mean that overnight rates, instead of being centred around the ECB's main refinancing rate, would sit at a small margin to the deposit rate." The ECB's deposit rate is currently 0.25 percent, while the benchmark is 1 percent.
That could all change, though, if the health of vulnerable banks suddenly improved. Excess cash in the system would soon disappear as banks sucked it up, driving market rates the 75 basis points towards the refinancing rate.
Such a move, although likely to take time, would be bigger than any single interest rate hike in the ECB's history, and all without the ECB's finger going near the interest rate trigger.
(Reuters: Bank aid may be no barrier to ECB rate hikes, September 23, 2010)

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sat Feb 26th, 2011 at 08:06:12 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

I would suggest that you are on to something when you speculated that the banks are segregating into good and bad banks. As to how the ECB managed as well as it did through much of 2008, I would think it was due to the power of denial. After 2008 it was suggested in the USA that banks looked at their own books and thought: "If I am in this shape, what are conditions like in these other banks? At that point they became unwilling to lend to one another even overnight.

The money market "broke the buck" in October '08 and the Fed had to guarantee deposits there. So most banks in the USA were propped up by TARP and The Fed, and also in Europe, banks would rather take .25% from EONIA than risk lending at higher rates to other banks. Eventually, some banks have come to be seen as credit worthy and they can lend overnight to other banks seen as creditworthy. But I don't know if things played out similarly in the Eruo-zone.

Or have I got all this horribly wrong?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Feb 28th, 2011 at 10:04:28 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

It could also be that the reason they don't take advantage of repo rates is that they would have to take such a haircut on the proffered securities that it would reveal their books for the sham that they may well be.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Feb 28th, 2011 at 10:09:20 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

I don't know what haircuts the ECB imposes on its "eligible collateral", but the "eligible collateral" is supposed to be relatively good. Sort of like Lehman's Repo 105 - everyone keeps thinking in terms of banks parking toxic assets at the central bank, but that's not what is happening.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Tue Mar 1st, 2011 at 04:14:29 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

Yeah, well less than 50% of their debt may qualify for a "bad" bank, and the badder they are the worse it gets.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 1st, 2011 at 09:26:16 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

ECB: Marketable assets

In order to be eligible as collateral for Eurosystem credit operations, marketable assets must comply with the eligibility criteria. Schematic overview
Eligibility criteria Marketable assets
Type of asset ECB debt certificates

Other marketable debt instruments: e.g.
Central government debt instruments
Debt instruments issued by central banks
Local and regional government debt instruments
Supranational debt instruments
Covered bank bonds
Credit institutions debt instruments
Debt instruments issued by corporate and other issuers
Asset-backed securities
Credit standards The asset must meet high credit standards. The high credit standards are assessed using Eurosystem credit assessment framework (ECAF) rules for marketable assets.
Place of issue EEA
Settlement /
handling procedures Place of settlement: euro area
Instruments must be centrally deposited in book-entry form with central banks or an SSS fulfilling the ECB's minimum standards.
Type of issuer / debtor / guarantors Central banks
Public sector
Private sector
International and supranational institutions
Place of establishment of the issuer / guarantor Issuer: EEA or non-EEA G10 countries
Guarantor: EEA
Acceptable markets Regulated markets
Non-regulated markets accepted by the ECB
Currency Euro
Cross-border use Yes
For details, see the latest version of
General Documentation, Section 6.2.1, 1.1MB, en

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Tue Mar 1st, 2011 at 10:21:51 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

I will let you tell me just how fine are the ABSs and the assets that cover the covered bank bonds. But I am very sure that all applicable regulations were met to the letter, if not the spirit.

The asset must meet high credit standards. The high credit standards are assessed using Eurosystem credit assessment framework (ECAF) rules for marketable assets.

And I will bet that the Irish banks met these standards right up until they didn't. Are those standards similar to those required of the banks during the stress tests?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 1st, 2011 at 08:52:07 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

The more I think about this the more angry I am about this:

The idea that sovereign bond purchases need to be "sterilised" to prevent inflation illustrates that the ECB has a very peculiar concept of sovereign debt, in contrast to its idea of private debt. Consider the ECB's own covered bond ("Pfandbrief") programme. In May 2009, the ECB decided to buy up to €60bn of asset-backed bonds issued by Eurozone commercial banks, without much protest. A year later the mere suggestion that the ECB might purchase a comparable amount of sovereign debt was, and continues to be, met with hysteria. Some ECB council members went so far as to claim that secondary market purchases of sovereign bonds were prohibited by the Treaty - which is not true. The constituent rules of the eurozone appear to be based on the bizarre idea that sovereign debt is toxic until such time as it has been sanitized by going through the bid-offer spread of a major investment bank, while privately-issued covered bonds are pristine, even at issue.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 02:12:29 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

"Consistency is the hobgoblin of small minds!" --- especially on a matter as important as money.

Perhaps the problem is the name -- European Central Bank. People fail to understand two crucial factors:

The center is Germany.
It is not a "common" bank, as in "acting in the common interest of all citizens of Euro-zone nations. It is an elite bank, as in "acting in the interests of the monetary elite, primarily German.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 2nd, 2011 at 09:21:03 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

PIMCO - Covered Bond Basics

Covered bonds are similar in many ways to mortgage- and asset-backed securities with one major difference: the loans backing a covered bond remain on the balance sheet of the issuing bank. The bonds are therefore obligations of the issuing bank, and the issuer retains control over the assets. It can change the make-up of the loan pool to maintain its credit quality, which can benefit investors, and it can also change the terms of the loans. By contrast, mortgage- and asset-backed securities are typically off-balance-sheet transactions in which lenders sell loans to special purpose vehicles that issue bonds, thus removing the loans--and the risk associated with those loans--from the lenders' balance sheets.

Germany introduced covered bonds, known as Pfandbriefe, in 1770 to finance public works projects. Since then, 24 other countries in Europe have adopted the covered bond structure, each with its own unique laws. In Spain, for example, covered bonds backed by mortgages, known as Cédulas Hipotecarias, were created by a special law in 1981, while in France, covered bonds, known as obligations foncières, can be traced as far back as 1852, with the establishment of the first mortgage bank, Credit Foncier de France. All countries with covered bond laws now allow for bonds backed by mortgages, while only a few allow covered bonds backed by public sector loans: Germany, France, Austria and Spain. In Denmark and Germany, covered bonds may also be secured by ship loans.

Originally, only specialised mortgage and public sector banks could issue covered bonds in Germany, but new laws in 2005 expanded the universe of potential issuers to include all credit institutions that meet certain credit quality requirements and obtain a license. Many other countries have also made the covered bond market accessible to more lenders, but some, including Denmark and France, still require that covered bond issuers limit their business to making high quality loans in specific areas, such as mortgages.

German asset-backed securities = good to purchase in the primary market.

Peripheral sovereign bonds = illegal to purchase in the primary market, toxic to purchase in the secondary market.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 10:17:24 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

German asset-backed securities meeting "certain credit quality requirements", don't forget.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 11:02:22 AM EST
[ Parent ]

Covered bonds (none / 1)

have historically been the safest kinds of bonds - because they are backed by both the signature of the issuer AND by valuable assets.

Given that issuers are still fully on the hook, the temptation, as in non-recourse ABSs, to game the system by slowly worsening the quality of the assrts provided as security, is inexistent.

It's a practical way for serious issuers to recycle their long term assets and get some liquidity - but as the debt stays on their balance-sheet, they can't do that beyond certain limits.

As a matter of fact, covered bonds were invented at a time when sovereign or bank defaults were rather frequent, and they were specifically designed to ensure that they could not happen with them.

So there are good reasons to treat covered bonds as high quality collateral.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 6th, 2011 at 05:18:09 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

For more info on Pfandbriefe, go to this page at ECBC, click on Pfandbriefe, then scroll down. Other types of covered bonds can be compared.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 11:11:44 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

click and hold to enlarge

From the ECBC's Factbook 2010.

Germany goes in for public sector-backed covered bonds more than mortgage-backed. But still has more than twice as much outstanding as Country N°2, Spain.

More to come.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 11:36:28 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

So the ECB could have bought 60 billion worth of public-debt-backed covered bonds without any complaints or need for sterilization in mid-2009?

But buying public debt requires sterilization and is accompanied by screams of bloody murder.

The sanitizing effect of investment banks, indeed.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 11:44:18 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

The ECBC Factbook linked above has a chapter

1.2 WAS THE ECB COVERED BOND PURCHASE PROGRAMME A SUCCESS?

Opening key fact:

The ECB disclosed daily the purchase volume under its programme. In addition, monthly reports on the purchases were published disclosing the amount purchased in the primary and secondary market. However, the ECB did not disclose any additional information regarding the breakdown by currency or country, not even in the final report. We only know that "in total, 422 different bonds were purchased, 27% in the primary market and the remaining 73% in the secondary market. The Eurosystem mainly purchased covered bonds with maturities of three to seven years, which resulted in an average modified duration of 4.12 for the portfolio, as of June 2010". We also know that the "Eurosystem intends to hold the purchased covered bonds until maturity".

The paper assumes that the €60bn were allotted as per national bank capital holdings in the ECB, which would give the Bundesbank practically a quarter.

The Conclusion states that the programme did a lot for the covered bond market. But:

The only caveat has been the domestic bias of the purchases by the national central banks which based on the flow we saw and other anecdotal evidence bought primarily paper from issuers out of their own countries. Hence, the German, French and Italian issuers benefited isproportionally whilst the Greek, Spanish and Portuguese markets, despite having arguably the highest needs, received less support due to their lower outstanding covered bond volumes.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 12:08:30 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

So the ECB acted as market maker of last resort for the covered bond market. Why can this not be done for the sovereign bond market without giving the serious people apoplexy?

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Wed Mar 2nd, 2011 at 04:46:08 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (4.00 / 3)

Oh, but it can. All the governments of the relevant countries have to do is found a government-owned and -run bank, and have that bank issue covered bonds against its own sovereign debt. And viola, the purifying power of the bid-ask spread of a - nominally - private bank has turned the toxic public debt into a pristine private monetary instrument.

These rules are a fucking farce.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 2nd, 2011 at 10:05:07 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

JakeS:

These rules are a fucking farce.

Been screaming about this for over a year now. But finally we're amassing a wealth of evidence of the extent to which the Eurozone is built on bullshit.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Thu Mar 3rd, 2011 at 04:43:15 AM EST
[ Parent ]

it's not so simple (none / 0)

It's not turning public debt into something good: it's turning an extra-volume of public debt, plus the signature of the entity issuing the bonds, into something good. Overcollateralisation, plus recourse over someone else's paid-up equity: it does make a difference.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 6th, 2011 at 05:21:02 AM EST
[ Parent ]

Re: it's not so simple (none / 0)

Why is buying public bonds inflationary and in need of sterilization, while buying covered bonds isn't?

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Mar 6th, 2011 at 05:26:55 AM EST
[ Parent ]

Re: it's not so simple (none / 1)

If, as with Portugal just now, a country is in a situation where it seems unlikely that it will have the tax base to pay off its obligations, covered bonds might not be such a good solution. Why put public assets such as hydro power, wind power, rail, etc. up as collateral for covered bonds? That would seem a prelude to loss of public control of these assets in a default. It would seem more in the (Portuguese) public interest to leave the debt backed by "the full faith and credit" of the nation and let the debtors come after the whole angry nation. At least the public would retain the benefits of public ownership of power generation, rail, etc.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 6th, 2011 at 09:23:07 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

I wondered who was putting a figure so deep into the comment thread that the post had to be made almost illegibly tiny to get rid of the pan and scan effect.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 2nd, 2011 at 04:05:57 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Mar 2nd, 2011 at 11:49:01 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 1)

I now know where to find the haircuts that the ECB imposes on the repos of different kinds of assets.

Francesco Papadia is the one ECB official quoted as making sense elsewhere in this discussion. I found an ECB page: Occasional papers by Francesco Papadia. He has only one - props to Papadia for not decreasing the signal-to-noise ration by publishing more often than he has something interesting to say.

Anyway, the paper Credit risk mitigation in central bank operations and its effects on financial markets: the case of the Eurosystem [PDF] includes the following table on page 9:

The quoted source presumably contains more information about repos and haircuts.

Notably, Pfandbriefe (covered bonds) are considered to have a higher credit risk than sovereign debt, for the purposes of repos, but lower risk that off-balance-sheet Asset Backed Securities. The definin characteristic of Covered Bonds is that they remain on the balance sheet of the issuer. As such, they are a form of securitization not motivated by regulatory arbitrage.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Mar 6th, 2011 at 05:37:55 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (4.00 / 2)

ARGeezer:

After 2008 it was suggested in the USA that banks looked at their own books and thought: "If I am in this shape, what are conditions like in these other banks? At that point they became unwilling to lend to one another even overnight.

I think we had been suggesting this here on ET since 2007. The interbank market froze in August 2007 and has stayed tight since.

The ECB was decisive in its liquidity provision, and one of its first unlimited liquidity operations was a two-week tender to tide banks over year-end in 2007 already. When unlimited liquidity at the wekly repos was introduced in October 2008 it was just more of the same.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Tue Mar 1st, 2011 at 04:12:55 AM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

I have two concerns here: that I might be way off base and that I might be glaringly obvious. But I am doing the best I can. :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 2nd, 2011 at 07:56:44 PM EST
[ Parent ]

Re: Central Banking 101: the EONIA heartbeat (none / 0)

The closest I can find is the ECB's Bank Lending Survey, published quarterly. The latest issue is for the 4th quarter of 2010 (PDF)

Deterioration in access to money markets and debt securities markets
In the last quarter of 2010, possibly reflecting the renewed financial market tensions following concerns about sovereign risk, banks generally reported a deterioration in their access to short-term money markets and the markets for debt securities issuance (see Chart 7), while they generally noted unchanged conditions for their access to true-sale securitisation of corporate and housing loans as well as synthetic securitization, i.e. the ability to transfer credit risk off the balance sheet. More specifically, in the last quarter of 2010, 24% of the banks (excluding banks replying "not applicable") reported a deteriorated access to short-term money markets with maturities exceeding one week, whereas access to very short-term money markets was deemed to have been more hampered for only 3%. For debt securities markets, around 25-30% of the banks reported a deteriorated access.

The sentence I've bolded is a very peculiar summary of the survey results. Looking at the appendix one finds that the question and answers were:

As a result of the situation in financial markets, has your market access changed when tapping your usual sources of wholesale funding and/or has your ability to transfer risk changed over the past three months, or are you expecting this access/activity to change over the next three months?

A) Interbank unsecured money market -- - 0 + ++
Very short-term money market (up to one week) 2% 11% 77% 9% 1%
Short-term money market (more than one week) 4% 25% 65% 4% 1%

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Carrie (migeru at eurotrib dot com) on Sun Feb 27th, 2011 at 12:16:26 PM EST
[ Parent ]

Central Banking 101: the EONIA heartbeat | 178 comments (178 topical, 0 editorial, 0 hidden)

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