Eurozone bank sector tensions are being watched closely by the European Central Bank, which has a range of policy weapons it could deploy swiftly to reassure nervous financial markets.
The ECB acted with unexpected boldness last week by announcing plans with the US Federal Reserve and other central banks to provide unlimited three-month dollar loans to European banks from October, which will bridge the year end. But it has far from exhausted its arsenal, and has options for boosting euro liquidity provision further.
“You can be sure there are plenty of plans and blueprints in the filing cabinet drawers at the ECB,” said Julian Callow, European economist at Barclays Capital. “If markets are not working, then central banks are there to supply liquidity – that has been recognised since the 19th century.”
Jean-Claude Trichet, ECB president, has argued that there is no euro liquidity crisis in the eurozone – but said central banks “stand ready” to act as necessary. The announcement on dollar liquidity last week showed that the euro’s monetary guardian was prepared to act pre-emptively to head off possible tensions.
Any new moves would come on top of the ECB’s government bond buying programme – which has been accelerated. Mr Trichet was served notice of the political constraints he faced at the weekend by Jens Weidmann, Germany’s Bundesbank president, who opposed the bond buying.
Mr Weidmann warned that the ECB already had “considerable risks” on its books and had given governments the wrong incentives by blurring fiscal and monetary policies, he told Der Spiegel magazine. “These risks must be reduced.”
Worries about the resilience of eurozone banks have been intensified by fears about the impact of a Greek default. One sign of the tension is the large sums that are being parked by banks at the ECB overnight instead of being loaned to others – almost €100bn ($138bn) at the end of last week.
The ECB is already fully meeting banks’ demands for weekly, monthly and three-month euro loans. It has pledged to continue doing so until early next year. But that deadline is likely to be extended, perhaps considerably.
Other options would be for the ECB to offer unlimited six-month or 12-month loans, as it did during the 2009 recession. Even longer periods could be considered, with the interest rate paid by banks linked to the ECB’s main policy rate, so as not to interfere with its task of combating inflation. Such moves would allow longer term planning by banks and provide reassurance that liquidity would not run dry.
The ECB could also broaden its asset buying programme – including by resuming purchases of covered bonds, which are issued by banks and backed by mortgages or public sector loans and are regarded as ultra safe investments. A €60bn covered bond purchase programme was unveiled in May 2009.
The ECB’s experience in using such crisis measures means steps could be implemented swiftly. Mr Trichet has not signalled that any action is imminent. But he noted in Poland last week that “central banks are more than ever an anchor of stability and confidence”.