Spain is trading between –45 bps and –50 bps. Italy is now trading below –40 bps1. And for Austria, Belgium and The Netherlands, rates have been moving downwards as well. One could say that whereas in the past the repo market was largely characterised by “collateral chasing cash”, today the main dynamic in some markets appears to be “cash chasing collateral”. The evolution of repo rates for different collateral classes over reporting dates suggest that the old pattern still exists in parallel with the new. As I will argue below, this observation provides a key to understanding the roots of these developments. New dynamics in the short term funding markets unsurprisingly lead to debate in the financial industry. There are concerns about short-term borrowing costs swinging sharply at the end of reporting periods, creating volatility and potentially spilling over into government bond markets – an effect we have indeed seen for core general collateral (GC) collateral. And some observers fear collateral scarcity might herald more general disruptions to the “plumbing” of the financial system, which would be especially problematic given ongoing structural changes in financial intermediation. Activity is after all shifting increasingly from banks to non-banks, and marketbased finance is, by and large, organised around collateralised lending. Perhaps inevitably, some point the finger at monetary policy, and in particular at the side-effects of the ECB’s asset purchase programme. The substantial creation of liquidity by the APP is argued to have pushed unsecured lending rates to the deposit floor, causing secured lending rates to fall even lower.
These monetary policy measures carried out by the Eurosystem have been necessary to ensure the continued orderly transmission of monetary policy throughout the euro area and to provide sufficient stimulus to bring inflation back to our objective. They have also been proportionate solutions to the scale of the problems they seek to solve. The ECB is aware of – and closely monitors – the potential impact of its monetary policy measures on market functioning. Indeed, as I mentioned earlier, full allotment was put in place precisely because the market wasn’t functioning. But in assessing the impact of its policies, the ECB must have first regard to its primary objective of price stability. Under our mandate, considerations of the robustness of the financial system and market functioning are only relevant once we have fulfilled that primary objective. Nonetheless, in designing the APP programme, the ECB has implemented a number of features designed to minimise the impact on market functioning. The hard legal constraints on issue and issuer limits reduce the influence the APP has on particular bonds. Our recent widening of eligible maturities and removal of the DFR floor permit purchases to be spread more widely and reduce pressure on specials. We have also put in place a number of securities lending facilities.