With knowledge of the exposure, it does not take a rocket scientist to figure out some scenarios. It turns out that, during the last exercise, such calculations would produce very reassuring numbers. But, for some reason, they were never made public by most analysts. Just as an illustration, the total exposure of French banks to sovereign debt in Southern Europe is 38% of total Tier 1 (13% without Italy). I will let you draw your own conclusions. Even in an apocalyptic scenario, only a small fraction of French banks’ Tier 1 ratio would be compromised. The same results apply, with some variations, to other countries. Conclusion Let me now conclude. Like all other major advanced economies, the euro area is facing big challenges in adjusting to the post-crisis environment. For all, these challenges relate to long-term fiscal sustainability. They are neither bigger nor smaller for the euro area than for the United States, the United Kingdom or Japan. They may be more complicated to solve because, by nature, our governance is more complex and we face specific collective action problems. It may take us longer to deal with difficulties as they appear, and we are paying a price for this relative inertia. But problems are being tackled, reforms are being implemented and I am convinced that, in the end, the euro area will emerge as a stronger and more robust entity than before the crisis.
At the outset of these purchases, we communicated that ETFs would only be used if their purchase is reasonably expected to achieve the objectives of the SMCCF more effectively than the purchase of underlying bonds.11 One month after starting ETF purchases, the Federal Reserve announced a framework to use corporate bonds as the SMCCF’s primary vehicle for providing support. In preparation, we had created a “Broad Market Index” of eligible corporate bonds, weighted proportionately by amount of debt outstanding from individual companies.12 We then began purchasing bonds across the index in a rules-based manner, taking care that our purchases are neutral toward eligible sectors and companies. I should note https://www.newyorkfed.org/newsevents/speeches/2020/sin201020  2/5  20/10/2020  The Federal Reserve’s Corporate Credit Facilities: Why, How, and For Whom - FEDERAL RESERVE BANK of NEW YORK  that in making an assessment of credit eligibility, we broadened our use of ratings to include perspectives from all Nationally Recognized Statistical Rating Organizations. Providing broad access also applies to the service providers that support the facilities. In early September, we announced the expansion of counterparties to the SMCCF, including several smaller and minority-owned broker-dealers.13 In early October, we announced the launch of our process to re-bid our engagement with the facility’s investment manager. This process has begun with the CCF cash management role, and in the coming weeks and months we will re-bid the remainder of the role.