In the few cases where counterparties have defaulted, for instance in the case of a subsidiary of Lehman Brothers, the Eurosystem was able to fully cover its exposure by seizing the posted collateral. At the same time, the collateral framework ensured that banks were able to obtain sufficient amounts of central bank liquidity throughout the crisis. This became most visible in the context of the two Very Long Term Refinancing Operations that the ECB conducted in 2011 and 2012. In these operations banks obtained collateralised central bank liquidity in the order of EUR 524 billion within only 10 weeks. This basic set-up of the collateral framework has remained the same since the beginning of monetary union; the three constituent parts of the Eurosystem collateral framework, i.e. (i) the counterparty framework, (ii) the basic eligibility criteria for underlying assets and (iii) the risk control measures, have remained largely unchanged. The Eurosystem maintains a broad counterparty framework and its eligibility criteria are still based on the same principles as at the beginning. This shows that the design of the Eurosystem collateral framework is in general very robust. However, some changes were necessary to guarantee a smooth implementation of monetary policy at times of financial market stress that led to a general reduction in access to market funding.
In this context, it should be borne in mind that in the long term, central banks can affect inflation and can have a corresponding impact on the nominal exchange rate, but they cannot affect the real exchange rate in the long run. If the real exchange rate rises because of an increase in the equilibrium real exchange rate and the Central Bank halts the rise in the nominal exchange rate, the real exchange rate will ultimately rise in any case, through larger wage increases and inflation. If the Bank had halted the rise in the exchange rate at all costs, inflation would probably be well above the target already, and it is very unlikely that inflation expectations would be at target. This would also have been inconsistent with the Bank’s legally mandated price stability objective. It would also have been quite costly, as the credibility of monetary policy would have been gone and interest rates in the future would need to be higher in order to restore that credibility. If there is the will to impede the rise in the real exchange rate and mitigate the crowding-out effect that tourism has on other sectors, which is certainly needed, but without sacrificing price stability, it must be done with policy instruments that can have a lasting impact on the real exchange rate, such as tighter fiscal policy.