2.1.1 Concepts and definitions
- As described in Chapter 1 of "The Single Monetary Policy in Stage Three; General documentation on Eurosystem monetary policy instruments and procedures" (General Documentation, dated November 2000), the Eurosystem has a set of monetary policy instruments at its disposal; the Eurosystem conducts open market operations, provides standing facilities and requires credit institutions to hold minimum reserves on accounts with the Eurosystem.
- Open market operations play an important role in the monetary policy of the Eurosystem for the purposes of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy.
- The Eurosystem has five types of instruments at its disposal for the conduct of open market operations. The most important instrument is reverse transactions (applicable on the basis of repurchase agreements or collateralised loans). The Eurosystem may also use outright transactions, the issuance of debt certificates, foreign exchange swaps and the collection of fixed-term deposits.
- Open market operations are initiated by the ECB, which also decides on the instrument to be used and on the terms and conditions for their execution. They can be executed on the basis of standard tenders, quick tenders or bilateral procedures. With regard to their aim, regularity and procedures, the Eurosystem open market operations can be divided into the following four categories:
- The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and a maturity of two weeks. These operations are executed by the national central banks on the basis of standard tenders. The main refinancing operations play a pivotal role in pursuing the purposes of Eurosystem open market operations and provide the bulk of refinancing to the financial sector.
- The longer-term refinancing operations are liquidity-providing reverse transactions with a monthly frequency and a maturity of three months. These operations aim to provide counterparties with additional longer-term refinancing and are executed by the national central banks on the basis of standard tenders. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker.
- Fine-tuning operations are executed on an ad hoc basis with the aim of managing the liquidity situation in the market and of steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. Fine-tuning operations are primarily executed as reverse transactions but can also take the form of outright transactions, foreign exchange swaps and the collection of fixed-term deposits. The instruments and procedures applied in the conduct of fine-tuning operations are adapted to the types of transactions and the specific objectives pursued in the operations. Fine-tuning operations are normally executed by the national central banks through quick tenders or bilateral procedures. The Governing Council of the ECB will decide whether, under exceptional circumstances, fine-tuning bilateral operations may be executed by the ECB itself.
- In addition, the Eurosystem may carry out structural operations through the issuance of debt certificates, reverse transactions and outright transactions. These operations are executed whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector (on a regular or non-regular basis). Structural operations in the form of reverse transactions and the issuance of debt instruments are carried out by the national central banks through standard tenders. Structural operations in the form of outright transactions are executed through bilateral procedures.
- The main and the longer-term refinancing operations are executed according to a pre-announced tender operations calendar (http://www.ecb.int under item Press releases/Indicative calendar for the Eurosystem's tender operations). The ECB aims at establishing conditions ensuring that counterparties in all Member States can participate in the main and the longer-term refinancing operations. Therefore, when compiling the calendar for these operations, the ECB has made appropriate adjustments to the maturity of the main and longer-term refinancing operations so as to take into account bank holidays in the individual Member States. The indicative calendar is prepared in compliance with the procedures set out in Chapter 5 of the above-mentioned General documentation.
- Standing facilities aim to provide and absorb overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates. Two standing facilities are available to eligible counterparties on their own initiative, subject to their fulfilment of certain operational access conditions.
- Counterparties can use the marginal lending facility to obtain overnight liquidity from the national central banks against eligible assets. Under normal circumstances, there are no credit limits or other restrictions on counterparties' access to the facility, apart from the requirement to present sufficient underlying assets. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.
- Counterparties can use the deposit facility to make overnight deposits with the national central banks. Under normal circumstances, there are no deposit limits or other restrictions to counterparties' access to the facility. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.
- The standing facilities are administered in a decentralised manner by the national central banks.
- The Eurosystem's minimum reserve system applies to credit institutions in the euro area and primarily pursues the aim of stabilising money market interest rates and creating (or enlarging) a structural liquidity shortage.
- Methodological notes: Euro area: the area encompassing those Member States in which the euro has been adopted as the single currency in accordance with the Treaty and in which a single monetary policy is conducted under the responsibility of the relevant decision-making bodies of the ECB. The euro area comprises Belgium, European Central Bank, Greece (from 1 January 2001), Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.
- The expression "national central banks" refers here to the national central banks of the Member States which have adopted the single currency in accordance with the Treaty.
- Eurosystem comprises the ECB and the national central banks of the Member States which have adopted the euro in Stage Three of EMU.
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