Tommaso Colozza

Ott 132018

In December 2010 the Basel Committee on Banking Supervision (BCBS) announced the introduction of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) to be put in place in 2015 and 2018, respectively. In the European Union (EU), the LCR became a binding requirement in October 2015, while for the NSFR there is currently no fixed implementation date. These requirements are important steps to improve banks’ resilience to liquidity shocks. However, they focus on individual banks, without taking into account liquidity risks and mitigation from a macroprudential perspective. Therefore, the Financial Stability Committee of the European Central Bank (ECB) agreed in 2016 that work on systemic liquidity would be carried out by a dedicated group.

The Task Force on Systemic Liquidity (TFSL) was set up to examine systemic liquidity risk and potential policy responses. Its objective was to develop a framework that measures systemic liquidity and helps to identify the need for macroprudential liquidity instruments from both a risk and a legal perspective. The TFSL focused on the macroprudential level to provide a broader view of liquidity developments and to facilitate the monitoring of potential build-ups of liquidity risks at system level. The European Central Bank (ECB) issued a first report providing the necessary foundation for assessing, measuring and monitoring systemic liquidity risk. The report is divided in five parts.

The first part establishes a concept of systemic liquidity and develops a case for considering macroprudential liquidity instruments. It builds upon the definition of systemic liquidity developed by the International Monetary Fund, explaining that systemic liquidity risk occurs when multiple financial institutions experience financial difficulties at the same time. Because of the possibility of public intervention (i.e. bailouts) in the event of a crisis, this concept is also strongly related to a collective moral hazard issue, as banks do not fully internalise the risks of a systemic event by holding more liquidity buffers.

The second part of the report discusses the microprudential liquidity tools available and the potential to use them for macroprudential objectives. Existing micro-prudential measures are not completely suitable for mitigating systemic liquidity risk. In particular, they ignore the importance of the cross-sectional dimension of systemic liquidity risk: interconnectedness and contagion effects.

The third part of this report analyses the legal basis for macroprudential liquidity requirements under current regulation. An examination of the legal basis of macroprudential liquidity tools is a key contribution of the report, which aims to provide clarity on the availability of macroprudential tools from a legal perspective.

The fourth part of this report develops a set of indicators for measuring system-wide liquidity risks. The focus is on the cyclical dimension of systemic liquidity to support policy discussions about potential countercyclical elements of existing liquidity measures or the need for new instruments. A total of 20 indicators were developed. Four criteria were used to analyse the indicators: (1) ability to capture systemic liquidity; (2) scope; (3) crisis signalling; (4) data availability. The dashboard of indicators focus on developments in systemic liquidity risk in the bank and non-bank financial system.

The fifth part of this report illustrates, via several case studies, the usability of the dashboard of indicators, and presents possible extensions to the indicators created. Since the dashboard shown is most useful when compared across time, long time series data showing the change in liquidity risk across different market conditions and different points in the business cycle are essential. Therefore, although the dashboard indicators are deemed useful at this stage, they are generally hampered by the lack of long time series and data granularity.

Taking into account the usability of the dashboard with its current limitations, the TFSL proposes using the dashboard as a reference tool for monitoring liquidity risk conditions and monitoring its effectiveness in the next two years. While a case for new macroprudential liquidity tools cannot yet be made from a risk perspective, primarily due to the lack of data availability and granularity, as well as the current highly accommodative monetary policy stance, the TFSL is of the opinion that the dashboard can be used to provide quantitative evidence of changes in the intensity of systemic liquidity risk conditions while improving the set of indicators.

Systemic liquidity concept, measurement and macroprudential instruments (PDF)

Ott 132018

The European Banking Authority (EBA) published today the periodical update to its Risk Dashboard, which summarises the main risks and vulnerabilities in the EU banking sector using quantitative risk indicators. In the second quarter (Q2) of 2018, the updated Dashboard identified ongoing improvements in the repair of the EU banking sector but also residual risks in banks’ profitability.

European Banks’ capital ratios remain high, in line with first quarter of 2018. The CET1 ratio remained at 14.5%, with a slight increase in the value of CET1 capital, accompanied by an increase in total risk exposures. CET1 ratios remained above 12% for all countries in the sample.  Compared to the previous period, the fully loaded CET1 ratio stood stable at 14.3%.

EU banks continue to improve overall quality of their loans’ portfolio. In Q2 2018, the ratio of non-performing loans (NPLs) to total loans kept the downward trend and achieved a level of 3.6%, the lowest since the NPL definition was harmonised across European countries. Compared to the previous period, despite a slight decrease in the total value of the loans granted, the further decrease of NPLs (now 731 billion euros) allowed to keep the NPL downward trend. This trend is observed for all bank-size classes, but dispersion remains across EU countries (ratios between 0.66% and 44.6%). The coverage ratio is 46% in Q2 of 2018, compared to 46.5% in Q1 of 2018.

Profitability remains a concern for the EU banking sector. When compared to Q1 of 2018, the average return on equity (ROE) rose in the second quarter from 6.8% to 7.2%. The heatmap shows an improvement in the share of total assets held by banks with ROE above 6%, now 67.1% compared to 64.1% in Q1 of 2018. The RoE’s dispersion remains stable with the difference between the upper quartile (10.1%) and the lower quartile (4.0%) at 6.1%.

Loan to deposit ratio reaches the lowest value since 2014. In Q2 of 2018, the ratio decreased to 116.2% when compared to 118.2% in the first quarter of 2018, mainly due to an increase in deposits. The leverage ratio (fully phased-in) remained at 5.1% when compared to Q1 2018. The asset encumbrance ratio decreased from 28.4% in Q1 2018 to 28% in Q2 2018. The liquidity coverage ratio (LCR) rose to 148.2% from 147% in the first quarter of 2018, remaining well above the 100% requirement.

EBA Dashboard 2018 – Q2 (PDF)

Ott 112018

The Financial Stability Board (FSB) today published a report setting out the analysis behind the FSB’s proactive assessment of the potential implications of crypto-assets for financial stability.

This report includes an assessment of the primary risks present in crypto-assets and their markets, such as low liquidity, the use of leverage, market risks from volatility, and operational risks. Based on these features, crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value, or a mainstream unit of account.

Based on the available information, crypto-assets do not pose a material risk to global financial stability at this time. However, vigilant monitoring is needed in light of the speed of market developments. Should the use of crypto-assets continue to evolve, it could have implications for financial stability in the future. Such implications may include: confidence effects and reputational risks to financial institutions and their regulators; risks arising from direct or indirect exposures of financial institutions; risks arising if crypto-assets became widely used in payments and settlement; and risks from market capitalisation and wealth effects.

Crypto-assets also raise several broader policy issues, such as the need for consumer and investor protection; strong market integrity protocols; anti-money laundering and combating the financing of terrorism (AML/CFT) regulation and supervision, including implementation of international sanctions; regulatory measures to prevent tax evasion; the need to avoid circumvention of capital controls; and concerns relating to the facilitation of illegal securities offerings. These risks are the subject of work at national and international levels and are outside the primary focus of this report.

FSB members have to date taken a wide variety of domestic supervisory, regulatory, and enforcement actions related to crypto-assets. National authorities and standard-setting bodies have issued warnings to investors about the risks from crypto-assets, as well as statements supporting the potential of the underlying distributed ledger technology (DLT) that they rely on to enhance the efficiency of the financial system. These actions are balanced between preserving the benefits of innovation and containing various risks, especially those for consumer and investor protection and market integrity.


Crypto-asset markets: Potential channels for future financial stability implications (PDF)

Ott 112018

As part of its thematic discussions on growth and jobs, the Eurogroup of 1 October will discuss the role of national ‘automatic stabilisers’ within the economic and monetary union. Public finances play an automatic stabilising role when deficits respond at unchanged policies to the economic cycle – mostly due to the cyclical behaviour of revenues. The stabilising properties of national public finances are one of the available means to overcome economic shocks, which is of particular relevance for Member States that cannot rely upon their own monetary and exchange rate policies, as is the case in the monetary union.

Analysis by the European Commission shows that public finances in the EU already provide a significant degree of automatic stabilisation of the economy, but that the situation differs markedly between Member States. Economic modelling shows that the degree of progressivity of taxes and benefits affects the strength of automatic stabilisers, together with the overall size of cyclical expenditures and revenues. Moreover, the stabilisation properties of these policies are more relevant, the quicker expenditures and revenues react to cyclical developments in the economy. However, policy setting may face a trade-off between achieving a strong degree of stabilisation and achieving other policy objectives, such as allocative efficiency.

When the economy is hit by a particularly large shock, automatic stabilisers may prove insufficient. Discretionary fiscal tightening, counteracting the effects of automatic stabilisers, can become necessary, particularly – but not only – in Member States with weaker fiscal positions. For this reason, building fiscal buffers during good economic times, as required under the SGP, is an important first line of defence. National automatic stabilisers are part of a continuum of economic structures and policy settings that determine how shocks are addressed, including: adjustment capacity in product, labour and capital markets; and the extent of private risk sharing across borders through the financial system. The efficiency of national automatic stabilisers is also relevant in the context of discussions on stabilisation instruments at central level.

Presentation on national automatic stabilisers (PPT)

Ott 112018

The revised Payment Services Directive (PSD2) aims to contribute to the development of the EU market for electronic payments, where consumers, retail operators and payment service providers will be able to enjoy advantages offered by the internal market of the European Union.


In particular, the new Community rules aim to:

  • stimulate competition by promoting innovative payment methods,
    • imposing a supervisory obligation also for suppliers of non-traditional payment systems (e-commerce payments)
    • reducing entry barriers for some types of payment service providers
    • forcing banks to allow access to their Third Party Provider (TPP) infrastructures through standardized APIs (Application Programming Interfaces)
  • protect the consumer and improve security in the use of payment services,
    • providing for more transparent transaction costs and a ban on the applicability of “surcharging” to the customer in the case of electronic payments
    • improving authentication procedures and data protection measures
    • Increasing customer protection in case of unauthorized payments.

Below is a non-exhaustive list of some of the new rules of law.

  • The PSD2 introduces two types of TPP: the Payment Initiation Service Providers (PISP) ​​and the Account Information Service Providers (AISP). Banks will be required to allow access of their back-end systems to TPPs in the first case following requests for initialization of payment transactions₂,₃, in the second case to requests for information on accounts held by their clients (with their authorization).
  • The PSD2 requires that “strong customer authentication” (SCA) measures be applied whenever, in carrying out payment transactions through traditional financial institutions or third-party suppliers, the service user:
    • accesses your online account
    • has an electronic payment transaction
    • performs any operation, through remote channels that involves a risk of fraud or abuse.

These measures involve the use of at least two independent factors: “knowledge” (security question, password), “possession” (token, personal device or “digi-pass”), “inherence” (fingerprint, retina data) ₄,₅,₆.

The publication of the RTS and the questions still open

The process of implementation of the PSD2 Directive has developed in a complex path. One of the main steps of this path is certainly the publication of the Regulatory Technical Standards (RTS) on Strong Customer Authentication (SCA) and Common Secure Communication (CSC), which took place on March 13th, 2018. On June 13th 2018 EBA published his Opinion on the “implementation of the RTS on SCA and CSC” ₇.

The definition of RTS and the related opinions are fundamental elements of the PSD2 framework, but the documents leaves some important issues open.

The text of the RTS will apply from September 14th 2019, but as of March 14th 2019, the “Account Servicing Payment Service Providers” (ASPSPs) will have to make the technical specifications of their access interfaces available to TPPs and provide them with a test environment to carry out tests of the applications that TPP will use to offer services.

The RTS only specifies that the ASPSPs must ensure that their interfaces follow the communication standards issued by international or European standardization organizations.

The Commission, recognizing that the lack of detailed requirements may lead to application problems, proposed the creation of the Application Programming Interface Evaluation Group (API EG) to evaluate the API specifications to ensure that they comply with the PSD2 and other applicable regulations (i.e. General Data Protection Regulation – GDPR).

The recommendations issued by the EG API will aim to create harmonized market practices among EU Member States in order to reduce implementation time and costs for the actors involved.

Further, open points with respect to the General Data Protection Regulation
The European General Data Protection Regulation (GDPR), which became enforceable in May this year, poses some additional questions regarding the PSD2, such as:

  • Determine who is responsible for obtaining consent from customers to enable banks to share their payment information with TPPs.

This is because if PSD2 foresees that TPPs can directly access the customer’s payment account information, provided that they have their explicit consent, using banks’ infrastructure to facilitate provision of payment initiation or account information services.

Under the GDPR, banks are responsible for the processing of their customers’ data and are responsible for the purposes and the manner in which personal data are processed and shared.

PSD2 adds data protection requirements by stating that TPPs are permitted to access the information only for specific purposes “explicitly requested by the customer” related to the provision of account information or payment initiation services.

Therefore, considering these interacting requirements, it seems that while TPPs will likely initiate the process of securing customers’ consent, including consent for their own activities and use of the data once obtained, banks will ultimately remain responsible for confirming, or otherwise separately obtaining, the consent directly with their customers.

Furthermore, EBA in his recent Opinion required above expressed his conviction regarding the fact that, if an AISP or a PISP provides services to a Payment Service User (PSU) on the basis of a contract signed by both parties, then the ASPSPs do not have to check consent. It suffices that the AISP and PISP can rely on the authentication procedures provided by the ASPSP to the PSU, when it comes to the expression of explicit consent. From our point of view, it’s not clear how the banks can verify the will of their customers and how the contractual obligations are going to involve the bank. In this sense, a joint pronouncement by EBA and EDPB is desirable.

  • Determine what constitutes “sensitive payment data”.
    The aforementioned RTS on SCA and CSC in PSD2 establish that banks must provide AISP with the same information made available to the customer₈,₉, when he accesses his own account information directly, if this information does not include “sensitive payment data”. Unfortunately, neither the RTS nor the PSD2 define the meaning of “sensitive payment data”, leaving to the discretion of the banks the task of determining which data they consider sensitive.

GDPR defines “personal data”, and therefore protects, such as any information relating to an identified or identifiable natural person. However, it also allows EU Member States to specify their own rules ” for the processing of special categories of personal data (‘sensitive data’)”, defined as personal data revealing racial or ethnic origins, political opinions, religious beliefs or philosophical beliefs, or union membership and processing of genetic data, biometric data.

The risk, in the absence of specifications on the point, is that the rule will be interpreted in a less restrictive way, facilitating access to additional and unnecessary information with respect to the purposes indicated in the standard increasing the risk of non-compliance.

It is necessary to change the pace
Further guidance by national and EU regulators is urgently needed on how companies can reconcile the requirements under PSD2 and the GDPR, both in the interim period and thereafter. It is desirable that companies manage the GDPR and PSD2 implementation programs in a coordinated way, taking into account reciprocal conditioning.

On the other hand, with the finalized RTS and the timing of implementation deadlines clarified, the companies should proceed quickly, clarifying their strategic positioning and then proceeding on the design and implementation of their communication interfaces, on SCA solutions, on the definition of operating models for the management of interaction with TPPs. All of these points will allow companies to face a rapidly-changing competitive environment such as the one enabled by PSD2₁₀.

David Mogini – Partner Deloitte Consulting

Michele Paolin – Partner Deloitte Consulting



  1. This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication
  2. The EBA also clarified in his Opinion issued on June 13th 2018 that PISPs have the right to initiate the same transactions that the ASPSP offers to its own PSUs, such as instant payments, batch payments, international payments, recurring transactions, payments set by national schemes and future-dated payments.
  3. The EBA also clarified in his Opinion issued on June 13th 2018 that PISPs have the right to initiate the same transactions that the ASPSP offers to its own PSUs, such as instant payments, batch payments, international payments, recurring transactions, payments set by national schemes and future-dated payments.
  4. The EBA also clarified in his Opinion issued on June 13th 2018 that the two factors in SCA need to belong to two different categories (the categories being knowledge, possession, inherence).
  5. The EBA also clarified in his Opinion issued on June 13th 2018 that SCA has to be applied to access to payment account information and to every payment initiation, including within a session in which SCA was performed to access the account data, unless an exemption under the RTS applies.
  6. The PSP applying SCA is the PSP that issues the personalised security credentials. Therefore, it is the same provider that decides whether or not to apply an exemption in the context of AIS and PIS. The ASPSP may, however, choose to contract with other providers such as wallet providers or PISPs and AISPs for them to conduct SCA on the ASPSP’s behalf and determine the liability between them.
  7. On June 13th 2018, EBA also published the document “Draft Guidelines on the conditions to be met to benefit from an exemption from contingency measures under Article 33(6) of Regulation (EU) 2018/389 (RTS on SCA &CSC)”.
  8. The EBA also clarified in his Opinion issued on June 13th 2018 that, AISPs can access the maximum amount of data available to PSUs with regard to their payment account(s) help with a specific ASPSP regardless of the electronic channel used to access it. I.e. if there are more data available through a computer connection online than through a mobile app, the AISP is able to access, via the ASPSP’s interface, the data available on the computer online, regardless of the channel used by the PSU to access the AISP.
  9. The scope of data to be shared with AISPs and PISPs by the ASPSP does not include the PSU’s identity (e.g. address, date of birth, social security number).


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Ott 062018

In the decade since the collapse of US investment bank Lehman Brothers sparked the most severe economic crisis since the Great Depression, regulation and supervision of the financial sector have been strengthened considerably. This has reduced the risk of another crisis, with all its attendant woes—unemployment, foreclosures, bankruptcies. But a new risk has emerged: reform fatigue.

As memories of the crisis fade, financial-market participants, policy makers, and voters are growing weary of calls for new regulations, and some are even demanding a rollback of existing ones. There is good reason to resist these pressures. The reform agenda that aimed to prevent another financial crisis has not yet been fully implemented, and new risks to global financial stability continue to emerge. To complete the agenda and meet new challenges, international cooperation will be vital, according to Chapter 2 of the latest Global Financial Stability Report.

The financial system is safer, reports the IMF. Banks have thicker and better capital cushions to absorb losses, and they are now better able to convert assets into cash in times of stress. Countries also use stress tests to check the health of the biggest banks and have set up oversight authorities to monitor risks to the financial system.

But there is still more work to be done. In particular, implementation of the so-called leverage ratio, which constrains banks’ ability to expand excessively during boom times, should be completed, and supervisors must not weaken oversight of major banks whose failure could pose a threat to the financial system. Where else should authorities focus their attention?

  • Liquidity: Before the crisis, many financial firms borrowed money for short terms in wholesale markets to fund longer-term assets. When trouble struck, they were unable to roll over the short-term borrowing, forcing them to sell assets at fire-sale prices. In response, the Basel Committee on Banking Supervision, a global standard-setting body, introduced the so-called Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). Their purpose: to encourage banks to hold more liquid assets as protection against a sudden drop in funding, and to better align the maturities of their assets and liabilities. Most countries have adopted the LCR, but the NSFR is still a work in progress. This work must be completed.
  • Macroprudential regulation: Countries, including India and the United States, have set up authorities to monitor and contain systemic risks. In many places, however, these authorities lack sufficient powers and tools to rein in excessive buildup of leverage and mismatches in non-financial corporations and households. Cross border cooperation in data sharing and systemic risks also should be improved.
  • Shadow banking: Countries have made progress in overseeing and, to a lesser extent, prudentially regulating so-called shadow banks, such as asset-management companies. But work remains to be done, and in many countries, including China and other emerging markets, the rapid growth of shadow banking could pose risks to other areas of the financial system.
  • Bank resolution: During the crisis, costly taxpayer-funded bailouts of large banks, while helping to limit the damage to the financial system, caused a popular backlash. After the crisis, countries adopted measures making it easier to wind down, or resolve, large banks in a way that imposes greater costs on shareholders and limits the use of public money. But there has been less progress on resolution regimes for insurance companies, and cooperating across borders to address the failure of the world’s largest banks is a particular challenge.

Above all, regulators must avoid complacency. It’s not possible to reduce the chance of a crisis to zero, nor should we seek to. With ten years of experience in implementing the new reforms, an evaluation of the impact of these on the broader economy is in order. Regulators could then assess whether tradeoffs arise between costs and burdens imposed by new rules and the benefits of greater safety. And they must remember that risk tends to rise during good times, and it migrates to new, unexpected corners of the financial system. They mustn’t get caught fighting the last war.

IMF: A Decade After Lehman, the Financial System Is Safer. Now We Must Avoid Reform Fatigue (HTML)

Ott 062018

The European Banking Authority (EBA) published today two reports, which measure the impact of implementing Basel III reforms and monitor the current implementation of liquidity measures in the EU. The EBA Basel III capital monitoring report includes a preliminary assessment of the impact of the Basel reform package – as endorsed by the Group of Central Bank Governors and Heads of Supervision (GHoS) – on EU banks assuming its full implementation.

The report on liquidity measures monitors and evaluates the liquidity coverage requirements currently in place in the EU. The EBA estimates that the Basel III reforms would determine an average increase by 16.7% of EU banks’ Tier 1 minimum required capital.  The liquidity coverage ratio (LCR) of EU banks stood at around 145% in December 2017, materially above the minimum threshold of 100%.

Basel III monitoring report

The Basel III monitoring report assesses the impact on EU banks of the final revisions of credit risk, operational risk, and leverage ratio frameworks, as well as of the introduction of the aggregate output floor. It also quantifies the impact of the new standards for market risk (FRTB), as set out in January 2016, and credit valuation adjustments (CVA).

Overall, the results of the Basel III capital monitoring, based on data as of 31 December 2017, show that European banks’ minimum Tier 1 capital requirement would increase by 16.7% at the full implementation date. The impact of the risk-based reforms is 21.8%, of which the leading factors are the output floor (6.3%) and operational risk (5.7%).  The leverage ratio is the constraining (i.e. the highest) Tier 1 requirement for some banks in the sample, explaining why part of the increase in the risk-based capital metric (-5.1%) is not to be accounted as an actual increase of the overall Tier 1 requirement.

Change in total Tier 1 minimum required capital, as percentage of the overall CRR/CRD IV minimum required capital, due to the full implementation of Basel III (2027), in %

Source: EBA QIS data (December 2017)

To comply with the new framework, EU banks would need EUR 24.5 billion of total capital, of which EUR 6.0 billion of additional CET1 capital.

EBA report on liquidity measures

The EBA report on liquidity measures under article 509(1) of the Capital Requirements Regulation (CRR) shows that EU banks have continued to improve their LCR. At the reporting date of 31 December 2017, EU banks’ average LCR was 145% and the aggregate gross shortfall amounted to EUR 20.8 billion corresponding to four banks that monetised their liquidity buffers during times of stress. A more in-depth analysis of potential currency mismatches in LCR levels, suggests that banks tend to hold lower liquidity buffers in some foreign currencies, in particular US dollar.

2018 Basel III Monitoring Exercise Report (PDF)

Ott 062018

Trading in foreign exchange and other fast-paced electronic markets is increasingly spread across a range of platforms, with non-bank intermediaries, most notably principal trading firms, gaining a stronger foothold. In addition, access to data and data-centric technologies increasingly defines competitive and market structure changes.

The Bank for International Settlement (BIS) recently issued a report analyzing the major developments in the evolution of market structure and their implications for central banks. Market monitoring is a core part of central bank activities for operational purposes and to help fulfil their financial stability mandates.

The report highlights three key structural trends:

  1. Trading is increasingly fragmented across a range of new venues, while the frequency of activity and speed of information flows have accelerated significantly, especially in foreign exchange markets.
  2. Liquidity provision has become more concentrated among the largest banks, as smaller players resort to an agency model of market-making or exit the business altogether. At the same time, a new set of non-bank intermediaries, most notably principal trading firms, have strengthened their positions.
  3. Greater electronification has led to the commoditisation of large quantities of high-frequency data.

As many central banks participate actively in fast-paced electronic markets (for example, when implementing monetary policy) they are adapting their approaches to market monitoring. This includes the range of participants with whom they engage, the types of data collected, and the tools and technologies used.

The report points to an overall trend among central banks towards greater usage of high-frequency, transaction-level data. Monitoring market conditions in near time using such data can support monetary policy implementation and foreign exchange reserves management. Over the long term, such monitoring can serve financial stability purposes, for example, by allowing a better understanding of structural trends or aiding the analysis of specific events such as recent “flash crashes”.

BIS: Monitoring of fast-paced electronic markets (PDF)

Ott 062018

By decision of 4 March 2015, the European Central Bank (ECB) put in place a secondary markets public sector asset purchase programme (‘PSPP’). The PSPP is one of the four sub-programmes of the Expanded Asset Purchase Programme (‘APP’) announced by the ECB in January 2015 and generally referred to as ‘quantitative easing’. The other three sub-programmes of the APP, to which the PSPP is subsidiary, concern the purchase of private bonds.

The APP, and therefore the PSPP, aim to respond to the risks of deflation in the euro area and thus to maintain price stability.  A large purchase of securities, including public sector bonds, is supposed to ease monetary and financial conditions enabling undertakings and households to obtain financing at more favourable prices. In principle, this stimulates investment and consumption, which contribute to returning inflation rates to the target level, namely below, but close to, 2%. The PSPP was set up in an environment where key ECB interest rates were at their lower bound and private purchase programmes were judged to have provided insufficient scope to achieve that goal. The only category of securities considered capable of providing the purchase volume needed to bridge the inflation gap, owing to its market volume at that time, was that of public sector bonds.

Several groups of individuals have brought before the Bundesverfassungsgericht (Federal Constitutional Court, Germany) various constitutional actions concerning various decisions of the ECB relating to the APP, the participation of the Deutsche Bundesbank (German Central Bank) in the implementation of those decisions or the alleged failure of it to act with regard to those decisions and the alleged failure of the Federal Government and the Lower House of the German Federal Parliament to act in respect of that participation and those decisions.

They claim that the PSPP infringes the prohibition of monetary financing of the Member States 2 and the principle of conferral of powers3 Moreover, they claim that the decisions on the PSPP undermine the principle of democracy enshrined in the Grundgesetz (German Basic Law) and, accordingly, undermine German constitutional identity.

In today’s Opinion, Advocate General Melchior Wathelet proposes that the Court should reply to the Bundesverfassungsgericht by stating that the examination of the decision of the ECB establishing the PSPP4 (‘the PSPP decision’) has not revealed any factor capable of affecting its validity.

The Advocate General considers, in the first place, that the PSPP decision does not infringe the prohibition of monetary financing. The PSPP does not give the European System of Central Banks (ESCB)’s intervention an effect equivalent to that of a direct purchase of government bonds from the public authorities and bodies of the Member States and, secondly, it is not such as to lessen the impetus of the Member States to follow a sound budgetary policy.

As regards the claim that the PSPP has an effect equivalent to that of a direct purchase of government bonds from the public authorities and bodies of the Member States, the Advocate General considers that the PSPP offers sufficient guarantees to prevent the conditions of issue of government bonds from being distorted by the certainty that those bonds will be purchased by the ESCB after their issue and to prevent operators which are active on the government bond markets from being able to act, de facto, as intermediaries for the ESCB for the direct purchase of bonds.

In that regard, the Advocate General notes in particular that (i) the ECB Governing Council decides on the scope, the start, the continuation and the suspension of the intervention on the secondary markets envisaged by the PSPP, (ii) the PSPP is subsidiary in relation to the other three APP programmes which concern the purchase of private bonds, (iii) unlike the OMT, the PSPP does not provide for the selective purchase of bonds, rather it provides for purchases in a manner which is representative of all the Member States of the euro area, (iv) the holding of bonds is, in principle, limited to 33% of bonds from a single issue and the ESCB is prohibited from holding more than 33% of the outstanding bonds of a single issuer for the entire duration of the PSPP, (v) there must be a minimum period between the issue of a security on the primary market and its purchase on the secondary market and (vi) the PSPP procedures communicated by the ECB are of a general nature.

In the second place, the Advocate General considers, as regards whether the PSPP exceeds the ECB’s mandate in the light of its volume, its period of application and the ensuing consequences, that the PSPP pursues a monetary policy objective using instruments which fall under that same policy. In his opinion, the ECB did not commit a manifest error of assessment in determining the objective of the programme, or in its choice of instruments to be implemented. Moreover, it did not misuse its powers or manifestly exceed the limits of its discretion.

In addition to making the purchase of government bonds conditional upon the credit quality of the issuer or guarantor, three of the PSPP’s characteristics in particular ensure that the programme does not, principally, pursue an economic policy objective. First, purchases of government bonds under the PSPP are subsidiary in relation to the activities authorised by the other three APP programmes which all concern the purchase of private bonds. Second, the purchases authorised by the PSPP are distributed across all of the euro area Member States in accordance with a fixed and objective distribution key, which is independent of the individual economic situation of those States. Third, risk sharing is limited to 20% of purchases made under the PSPP.

Court of Justice of the European Union – Press Release No 145/18 (PDF)


Set 272018

The European Central Bank (ECB) published a first thorough report taking look at the impact on taxpayers of the financial sector support measures taken in the latest ten years, following the Great Financial Crisis. This is done by focusing on the measures’ impact on deficits and debt, and on the state guarantees granted to banks and other financial institutions.

Financial sector support measures can affect deficit and debt differently. Unless they are financed from cash reserves, financial sector support measures will increase the general government gross debt. Whether they will also affect the budget balance depends on whether the operation presents a clear loss for the government. If so, they are classified as a capital transfer for statistical purposes, meaning they have an impact on the budget balance and debt ratio. The acquisition of financial assets above market price and capital injections to cover bank losses are typical examples of this.

In case the government receives shares in a bank or debt securities that are considered to be of equal value to the capital injection it provides, the support measure is classified as a financial operation that only affects the general government gross debt. The statistical reclassification of entities from the financial sector to the general government sector, notably reflecting the nationalisation of banks, also increases government debt but not the budget deficit.

The fiscal impact of the financial sector support that euro area governments provided following the 2008 financial crisis was large and varied greatly across countries, and has only partially been reversed. During and after the global financial crisis  most euro area governments provided support to individual financial institutions in order to safeguard financial stability.


Impact of financial sector support measures on euro area deficit and debt, and volume of contingent liabilities (GDP%)

Source: European Central Bank

At the euro area level, financial sector support measures had a very large impact on the aggregate budget deficit in 2010 (0.7% of GDP), 2012 (0.5% of GDP) and 2013 (0.3% of GDP) (see Chart A).  Viewed across several years, the scale of the impact was in many cases equal to, or even far greater than, the effect of fiscal measures taken during regular budget cycles. Eight countries saw a cumulative impact between 2008 and 2017 that was higher than the euro area average, varying from an increase in the budget deficit of more than 4 percentage points of GDP in Spain, Austria and Latvia to more than 27 percentage points in Ireland.

The impact on the euro area debt-to-GDP ratio, which peaked at almost 5.9% in 2012, stood at 4.1% in 2017. The maximum impact of the support measures on the debt-to-GDP ratio was 10% or more in eight euro area countries, including Germany, the Netherlands, Austria and Slovenia as well as the four euro area countries that required an EU/IMF adjustment programme (Ireland, Greece, Cyprus and Portugal). The time profile of the impact of the support measures on the general government gross debt varies considerably.

The impact has started to partially and slowly reverse in most countries and in the euro area as a whole, thanks to the income generated from the support measures, such as dividends received on shares in financial institutions and fees received for public guarantees, and the sale of financial assets. Across countries, the recovery from the support provided has been particularly pronounced in Ireland, where the impact of financial sector support measures on the debt-to-GDP ratio had declined by 30 percentage points by 2017 compared with the peak, and also the Netherlands (ten percentage points since the peak), Latvia and Germany (six percentage points since the peak). However, support measures added to the debt in Italy, Cyprus and Portugal in 2017.

Euro area contingent liabilities fell from more than 8% of GDP in 2009 to 1.4% in 2017. In most cases, the explicit guarantees that many euro area governments provided to individual institutions at the height of the financial crisis  or, in a few instances, the financing of asset management vehicles  have been phased out. This mostly represents a positive development, as a return to financial stability meant there was no need to renew expiring guarantees.

Some guarantees have however been called, and receiving entities have been classified in the general government sector, causing the reduction in the guarantee to be matched by an equivalent increase in government debt and/or deficit. For example, one-fifth of the guarantees provided as part of the partial privatisation of the Portuguese bank Novo Banco in October 2017, amounting to 2% of GDP, have been called, serving to increase the 2018 deficit by 0.4 percentage point of GDP. Six euro area countries, including France, Italy and Spain, still had outstanding contingent liabilities exceeding 1% of GDP in 2017. In addition, in July 2018 Cyprus provided guarantees for an asset protection scheme (APS) as part of the sale of the Cyprus Cooperative Bank (CCB). The APS covers potential unexpected losses on assets which have been acquired by the buyer of CCB, amounting to about 13% of GDP.

The widespread, large and long-lasting fiscal impact of financial sector support measures underlines the importance of further reinforcing the institutional framework in the euro area.

ECB: The fiscal impact of financial sector support measures: where do we stand a decade on from the financial crisis? (HTML)