SUERF Webinar “CBDC: State of play, practical challenges, open issues” with Ulrich Bindseil (ECB) and Morten Bech (BIS). Moderated by Dirk Niepelt. December 4, 2020, 2 pm.
- BIS: Central banks and BIS publish first central bank digital currency (CBDC) report laying out key requirements (9 October 2020)
- ECB: A Digital Euro (updated regularly)
- Bank of Russia: Bank of Russia announces public discussions on digital ruble (13 October 2020)
Related recent developments:
- Digital Dollar Project: The Digital Dollar Project Publishes Nine Pilot Scenarios to Test Elements of a US CBDC (October 2020)
- Monetative e.V.: Digitales Zentralbankgeld aus Sicht der Zivilgesellschaft (June 2020)
Die Volkswirtschaft, July 24 2020. PDF.
Clarifying the connections between outright monetary financing, QE, the distribution of seignorage profits, the relationship between fiscal and monetary policy, and central bank independence.
Wenn Parlamentarier höhere Gewinnausschüttungen der Nationalbank fordern, Kritiker im
Euroraum mehr «Quantitative Easing» oder Helikoptergeld verlangen und andere Stimmen
monetäre Staatsfinanzierung monieren, dann steht die Beziehung zwischen Geld- und
Fiskalpolitik zur Debatte. Eine Auslegeordnung.
FAS, 31 May 2020. PDF.
Monetary deficit financing is the norm—after all, central banks distribute their profits. Monetary financing occurs in the context of regular open market operations and QE and, hyper charged, with helicopter drops. The question is not whether monetary policy should finance the government, but why it does so, and to what extent. Fiscal and monetary policy are inherently connected; what constitutes monetary policy is defined by objectives.
The court’s press release: Beschlüsse der EZB zum Staatsanleihekaufprogramm kompetenzwidrig.
Critical discussion on Verfassungsblog by Alexander Thiele.
Critical Twitter thread by Jean-Pierre Landau.
Corinna Budras in the FAZ:
Viel größer sind die Bedenken über Kompetenzstreitigkeiten, die nun von Polen oder Ungarn angeführt werden könnten. Das wissen auch die Bundesverfassungsrichter, die diese Kritik in ihrem Urteil schon vorwegnehmen: Nur in absoluten, eng begrenzten Ausnahmefällen sei sie möglich, nämlich dann, wenn ein ausbrechender Rechtsakt” vorliege, der dazu führe, dass sich eine europäische Institution neue Kompetenzen schaffe, die ihr niemals übertragen worden seien und der deutsche Bürger dadurch in seinen Grundrechten verletzt werde. Konkret bedeutet das: Wenn sich Europa so ausbreitet, dass der demokratisch gewählte Bundestag nichts mehr zu sagen hat, steht das Bundesverfassungsgericht Gewehr bei Fuß.
Martin Wolf in the FT:
What can be done? … Or, the decision could be ignored. If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court. … The EU could initiate an infringement proceeding against Germany. But its direct target would be the German government, which is caught between the EU organs on the one hand and the court on the other.
In the SZ, Wolfgang Janisch and Stefan Kornelius summarize an interview with one of the judges, Peter Michael Huber:
“Der Satz der Kommissionspräsidentin von der Leyen, das Europarecht gelte immer und ohne jede Einschränkung, ist, so gesehen, falsch”, sagte Huber in einem Interview der Süddeutschen Zeitung. “Auch die anderen Mitgliedstaaten kennen äußerste, an ihre Verfassungsidentität anknüpfende Grenzen, wo sie den Vorrang der nationalen Verfassungen vor dem Europarecht postulieren.” Das betreffe aber nur einen winzigen Teil des EU-Rechts.
… “Von der EZB verlangen wir nur, dass sie vor den Augen der Öffentlichkeit ihre Verantwortung übernimmt und auch begründet – auch gegenüber den Leuten, die Nachteile von ihren Maßnahmen haben.” Weder verlange das Gericht, das Anleihekaufprogramm zu unterlassen, noch mache es inhaltliche Vorgaben. “Wir wollen nur einen Nachweis, dass das noch innerhalb ihres Mandats ist.”
Nach Hubers Worten könnte man etwa eine Begründungspflicht in die EZB-Satzung aufnehmen. Und das Verhältnis zum EuGH ließe sich durch einen Mechanismus zur Konfliktschlichtung entschärfen. “Das Vernünftigste wäre, den Ball flach zu halten und zu überlegen, ob unser Urteil nicht doch ein paar richtige Punkte enthält.”
Michael Rasch in the NZZ:
Die Verfassungsrichter vermissten besonders eine Prüfung der Verhältnismässigkeit durch den EuGH. Die Luxemburger Richter hatten, wie auch die deutschen Verfassungsrichter, von der EZB die Verhältnismässigkeit der Massnahmen eingefordert, diese aber eben nicht analysiert.
On German TV, Frank Bräutigam interviews Andreas Voßkuhle.
According to a BIS press release, several leading central banks collaborate with the BIS on matters relating to the introduction of CBDC:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank, together with the Bank for International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions.
The group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies. It will closely coordinate with the relevant institutions and forums – in particular, the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI).
The group will be co-chaired by Benoît Cœuré, Head of the BIS Innovation Hub, and Jon Cunliffe, Deputy Governor of the Bank of England and Chair of the CPMI. It will include senior representatives of the participating institutions.
In a CEP Discussion Note, Pierre Monnin argues that financial markets mis-price climate related credit risk. If this were corrected some securities held by the ECB would loose their investment grade credit rating.
Assessing climate risks requires methodologies based on forward-looking scenarios, on complex cause-and-effect linkages and on data that has not been observed in the past. Such models are at their infancy, but already offer meaningful insights. This note provides an overview of key components that such models are built on and illustrates them with examples of the analytics that are already available. It also applies one of the available methodologies to assess transition risk to the corporate bond holdings of the European Central Bank.
The ECB launches its Target Instant Payment Settlement (TIPS) system, which facilitates instant money transfers between banks and allows end users connected to those banks to make instant retail payments across the Euro zone.
From the ECB’s website:
TIPS was developed as an extension of TARGET2 and settles payments in central bank money. TIPS currently only settles payment transfers in euro. However, in case of demand other currencies could be supported as well. …
… a number of national solutions have been developed, or are under development, across the EU. A challenge for the Eurosystem is to ensure that these national solutions do not (re)introduce fragmentation … TIPS aims to minimise this risk by offering a service that can help ensure that any bank account holder in Europe can be reached. …
Participating payment service providers can set aside part of their liquidity on a dedicated account opened with their respective central bank, from which instant payments can be settled. It is only possible to add funds to TIPS accounts during TARGET2 opening hours.
As settlement in TIPS takes place in central bank money, participation in TIPS depends on being eligible to access central bank money. For this reason, in order to open an account in TIPS in euro, an institution needs to fulfil the same eligibility criteria as for participation in TARGET2.
Banks pay at most 0.2 cent per transaction during the first two years of operation.
See also the blog post on the Bank of England’s related, but different “interledger” program.
Central bank digital currency gets closer by the day …
On Moneyness, JP Koning discusses the ability or not of the U.S. treasury to enforce financial sanctions overseas. Focusing on the Iran sanctions that ran from 2010 to 2015 (with strong international support) and are scheduled to be reimposed soon (without such support) Koning compares the U.S. sanctions regime to an exclusivity agreement that a large retailer imposes on a manufacturer.
Foreign banks in places like Europe were free to continue providing transactions services to Iran, but if they did so they would not be able to maintain correspondent accounts at U.S. banks. To ensure these rules were enforced, U.S. banks were to be fined and U.S. bank executives incarcerated if found guilty of providing accounts to offenders. Fearful bank executives were very quick to comply by carefully vetting those that they offered correspondent banking services to.
Having a U.S. correspondent account is very important to a non-US bank. If a European bank has a corporate customer who wants to make a U.S. dollar payment, the bank’s correspondent relationship with a U.S. bank allows it to effect that payment. Since the revenues from U.S. dollar payments far exceeds revenues from providing Iranian agencies and corporations with payments services, a typical European bank would have had no choice but to abandon Iran in order to keep its U.S. correspondent account.
But what would happen if Iran were to invoice in EUR rather than USD and make payments using an account at a European bank, bank X say, without direct links to the U.S. and no U.S. correspondent account? The answer to that question depends on whether the U.S. treasury would be prepared to sanction a third financial institution, bank Y say, that collaborates with bank X (or a business partner of bank X) and relies on a U.S. correspondent account. In the most extreme scenario bank Y would be the European Central Bank.
One scheme would be to set up a single sanctions-remote bank that conducts all Iranian business. To defang the U.S. Treasury’s threat “do business with us, or them, but not both!”, this bank should not be dependent on U.S. dollar business. Without a U.S. correspondent, the Treasury’s threat to disconnect it from the correspondent network packs no punch. … Crude oil buyers from all over Europe could have their banks wire payments to [bank X’s] account via the ECB’s large value payments sytem, Target2. [Bank X] could also open accounts for companies in India, China, and elsewhere who want to buy Iranian crude oil with euros.
… There is also the extreme possibility that the U.S. would impose travel bans on the ECB itself, in an effort to force ECB officials to remove [bank X] from Target2. Here is one such threat: “Treasury this week designated the governor of Iran’s central bank—does any European country think Treasury can’t designate their own central bank governor too?” Look, the idea of preventing Mario Draghi from travelling to the U.S., or blocking his U.S. assets, sounds so unhinged that it’s not even worth entertaining.
The reason Iran and its trading partners were not able to break sanctions between 2010 and 2015, according to Koning, is that Europe (specifically the German chancellor Angela Merkel) supported the U.S. administration and imposed its own sanctions on bank X, cutting it off the SWIFT and Target2 networks.
In a CEPR discussion paper Christian Bayer, Chi Kim, Alexander Kriwoluzky analyze redenomination risk during the European debt crisis and how the European Central Bank’s interventions affected this risk. They conclude that the risk fell in the case of Italy but increased for France and Germany.
From the abstract:
… first estimate daily default-risk-free yield curves for French, German, and Italian bonds that can be redenominated and for bonds that cannot. Then, we extract the compensation for redenomination risk from the yield spreads between these two types of bonds. Redenomination risk primarily shows up at the short end of yield curves. At the height of the euro crisis, spreads between first-year yields were close to 7% for Italy and up to -2% for Germany. The ECB’s interventions designed to reduce breakup risk successfully did so for Italy, but increased it for France and Germany.
See also this earlier blogpost.
In an NBER working paper, Arvind Krishnamurthy, Stefan Nagel, and Annette Vissing-Jorgensen analyze which components of bond yields were affected by the European Central Bank’s government bond purchasing programs.
Given the institutional restrictions on monetary policy in the Euro area, the ECB had to carefully argue why it intervened in the first place. (To many, the case was obvious; the ECB intervention amounted to quasi-fiscal policy. But an intervention with this objective would not be covered by the rules of the Euro area.) It gave two reasons for the SMP, OMT, and LTRO:
The ECB has publicly stated that these policies reduce redenomination risk, i.e., the risk that the Eurozone might break up and countries redenominate domestic debt into new domestic currencies, and financial market “dysfunctionality,” i.e., segmentation- and illiquidity-induced pricing anomalies.
The authors decompose bond yields into five components: an expectations hypothesis component; a euro-rate term premium; a default risk premium; a redenomination risk premium; and a component due to sovereign bond market segmentation. To identify the non-observable, country-specific components (reflecting default risk, redenomination risk, and sovereign bond market segmentation), the authors use information from asset prices that are differentially exposed to these components.
Specifically, they use the fact that
foreign-law sovereign bonds denominated in US dollars cannot be redenominated through domestic law changes … and redenomination into a new currency should affect all securities issued in a given country under the country’s local law equally.
The authors find that
the default risk premium and sovereign bond segmentation effect appear to have been the dominant channels through which the SMP and the OMT affected sovereign bond yields of Italy and Spain. Redenomination risk may have been present at times and it may have been a third policy channel for the SMP and OMT in the case of Spain and Portugal, but not for Italy. … default risk accounts for 30% of the fall in yields across SMP and OMT for Italy. Segmentation accounts for the other 70%. For Spain, the numbers are 42% (default risk), 15% (redenomination risk) and 43% (segmentation). For Portugal, the numbers are 40% (default risk), 24% (redenomination risk) and 36% (segmentation). For the LTROs, we find that their effect on Spanish bond yields worked almost entirely via the sovereign segmentation channel. We show that the more substantial impact of the LTROs on Spanish sovereign yields than on Italian and Portuguese sovereign yields is consistent with Spanish banks purchasing a larger fraction of outstanding sovereign debt in the months following the introduction of the LTROs.
In a CEPR discussion paper, Christoph Trebesch and Jeromin Zettelmeyer argue that
ECB bond buying had a large impact on the price of short and medium maturity bonds … However, the effects were limited to those sovereign bonds actually bought. We find little evidence for positive effects on market quality, or spillovers to close substitute bonds, CDS markets, or corporate bonds.
A multiple equilibria view of the crisis would probably suggest otherwise.
The ECB has published a first report on Stella, a joint research project with the Bank of Japan. The two banks are interested in potential roles that distributed ledger technology could play to support the financial market infrastructure. The report assesses whether existing payments systems could be safely and efficiently run on a distributed ledger. It concludes that
- a distributed-ledger-based system could meet the performance needs of real-time gross settlement systems, up to some limits;
- such a system could strengthen resilience.
In the FT, Claire Jones reports about the German Federal Constitutional Court’s decision to refer a case against the European Central Bank’s PSPP program to the European Court of Justice.
“In the view of the [court] significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank.” …
While Germany’s constitutional court said the OMT programme was legal, it stipulated, based on an earlier ECJ judgment, that bond purchases had to meet a number of requirements. On Tuesday the Karlsruhe-based court said there were “several factors” to indicate that one of these requirements — that bonds must be purchased on secondary markets and not directly from governments — was being violated under QE.
From the court’s statement:
… any programme relating to the purchase of government bonds on the secondary market must provide sufficient guarantees to effectively ensure observance of the prohibition of monetary financing. The Senate presumes that the Court of Justice of the European Union deems the conditions which it developed, and which limit the scope of the ECB policy decision on the Outright Monetary Transactions (OMT) programme of 6 September 2012, to be legally binding criteria. Against that background, the Senate further presumes that contempt of these criteria would amount to a violation of competences also with regard to other programmes relating to the purchases of government bonds.
… several factors indicate that the PSPP decision nevertheless violates Art. 123 AEUV, namely the fact that details of the purchases are announced in a manner that could create a de facto certainty on the markets that issued government bonds will, indeed, be purchased by the Eurosystem; that it is not possible to verify compliance with certain minimum periods between the issuing of debt securities on the primary market and the purchase of the relevant securities on the secondary market; that to date all purchased bonds were – without exception – held until maturity; and furthermore that the purchases include bonds that carry a negative yield from the outset.
… the PSPP decision can no longer be qualified as a monetary policy measure but instead must be deemed to constitute a measure that is primarily of an economic policy nature.
… the ECB Governing Council may be able to modify the rules on risk sharing within the Eurosystem in a way that would result in risks for the profit and loss accounts of the national central banks and also threaten the overall budgetary responsibility of national parliaments. Against that background, the question arises whether an unlimited distribution of risks between the national central banks of the Eurosystem regarding bonds in default where such bonds were issued by central governments or by issuers of equivalent status would violate Art. 123 and Art. 125 TFEU as well as Art. 4(2) TEU (in conjunction with Art. 79(3) GG).
Previous, related post.
The Economist reports about plans for Monte dei Paschi’s future:
… retail investors in the bank’s junior bonds, many of them ordinary customers. European state-aid rules say that they should lose their money along with shareholders. Technically, they will. In fact, to preserve their savings and avoid a political outcry, they will be deemed to have been “mis-sold” the bonds: they will receive shares which will in turn be swapped for new, safer bonds.
Italy has to come up with a restructuring plan, likely to involve job losses and branch closures, for the commission’s approval. (The ECB must also certify the bank’s solvency.) Bosses’ pay will be capped at ten times the staff average. And Monte dei Paschi must sell its sofferenze, the worst category of non-performing exposures, which in March amounted to 24% of all its loans. A state guarantee will cover senior tranches of these securitised debts. Atlante 2, a fund backed by Italian financial institutions, and others are negotiating with the bank over more junior slices.
In an ECB occasional paper, Ulrich Bindseil, Marco Corsi, Benjamin Sahel, and Ad Visser review the European Central Banks’s collateral framework.
From the executive summary, on misconceptions:
… differences e.g. with interbank repo markets: first, central banks are not subject to liquidity risk in the way “normal” market participants are, and can therefore accept less liquid collateral. Second, as the central bank has a zero default probability in its domestic market operations, collateral providers are willing to accept severe haircuts to obtain credit. …
According to the authors the ECB is the most transparent central bank when it comes to its collateral framework. But the latter is also complicated:
However, it is true that the ESCF is relatively broad in terms of the scope of eligible collateral and rather complicated. This is inevitable because of the diversity of financial institutions and markets in the euro area.
The IMF has released a report with an ex-post evaluation of Greece’s 2012 Extended Fund Facility (Exceptional Access under the 2012 Extended Arrangement under the Extended Fund Facility with Greece).
A critical discussion by Charles Wyplosz on VoxEU.
The Greek authorities are more optimistic than IMF staff about the economy’s outlook.
In the NZZ, Kjell Nyborg questions whether the collateral values of the securities the ECB accepts in monetary policy operations reflect market values. He argues that the valuation is discretionary and politicized.
Meine Analyse macht deutlich, dass der Besicherungsrahmen in der Euro-Zone in unterschiedlicher Ausprägung unter all diesen Problemen leidet. Das öffentliche Verzeichnis der zulässigen notenbankfähigen Sicherheiten enthält 30 000 bis 40 000 verschiedene Wertpapiere, von Staatsanleihen bis hin zu unbesicherten Bankanleihen und forderungsbesicherten Wertpapieren (Asset-Backed Securities). Die überwiegende Mehrheit dieser Wertpapiere hat keinen Marktpreis. Ungefähr ein Drittel all dieser Sicherheiten wird in nichtregulierten Märkten gehandelt. Zudem können Banken nichtmarktfähige Anlagen und Wertpapiere mit «privaten Ratings» verwenden, die nicht im öffentlichen Verzeichnis sind. Daher basieren die Werte der Sicherheiten mehrheitlich auf Modell- statt auf Marktpreisen. Interessanterweise ziehen Banken es vor, Sicherheiten zu benutzen, bei denen häufiger theoretische Preise verwendet werden. Generell tendiert die Besicherungspolitik der Euro-Zone zu risikoreichen und illiquiden Sicherheiten. Die untergeordnete Rolle des Marktes sieht man auch an der Häufigkeit, mit welcher die Sicherheitsabschläge für die Repo-Geschäfte des Euro-Systems aktualisiert werden: Dies geschieht lediglich alle drei bis vier Jahre.
Im Kern des Geldsystems in der Euro-Zone gibt es somit wenig Spielraum für Marktkräfte oder Marktdisziplin. Insgesamt kann die Besicherungspolitik des Euro-Systems als expansiv beschrieben werden. Die Liste notenbankfähiger Sicherheiten ist äusserst umfangreich und oft auf die «Bedürfnisse» von Banken in verschiedenen Ländern zugeschnitten. Sicherheiten können, zum Beispiel, durch Staatsgarantien aufgewertet werden. … Weil es im Kern des Euro-Geldsystems an Marktkräften und Marktdisziplin fehlt, entsteht ein Vakuum, das von anderen Kräften, wie Rating-Agenturen und der Politik, aufgefüllt wird.
… Ich dokumentiere, dass DBRS eine ausschlaggebende Rolle innehatte, indem sie über eine lange Zeit hinweg Italien und Spanien ein Rating von A– und Portugal ein solches von BBB– gab. Das hob den Wert der in diesen Ländern begebenen Sicherheiten um ungefähr bis 200 Mrd. € an und kann als unterstützende Massnahme für indirekte Bail-outs interpretiert werden.
Im Dezember 2011 und Februar 2012 hat die EZB eine ihrer wichtigsten geldpolitischen Massnahmen vor dem Beginn des Quantitative Easing implementiert. … Um aus dieser Möglichkeit Vorteil zu schlagen, hat die italienische Regierung gleichzeitig eine präzedenzlose Anzahl von Garantien für Bankanleihen mit niedrigem oder gar keinem Rating gesprochen. Damit erhöhte sie deren Besicherungswert. Darüber hinaus hat die EZB mehr als 10 000 unbesicherte, auf nichtregulierten Märkten gehandelte Bankanleihen der öffentlichen Liste notenbankfähiger Sicherheiten hinzugefügt, obwohl der aggregierte Wert notenbankfähiger Sicherheiten die Nachfrage von Banken nach Zentralbankgeld schon bei weitem überstieg.
The German Federal Constitutional Court has decided that the policy decision on the OMT program does not “manifestly” exceed the competences attributed to the European Central Bank:
If the conditions formulated by the Court of Justice of the European Union in its judgment of 16 June 2015 (C-62/14) and intended to limit the scope of the OMT programme are met, the complainants’ rights under Art. 38 sec. 1 sentence 1, Art. 20 secs. 1 and 2 in conjunction with Art. 79 sec. 3 of the Basic Law (Grundgesetz – GG) are not violated by the fact that the Federal Government and the Bundestag have not taken suitable steps to revoke or limit the effect of the policy decision of the European Central Bank of 6 September 2012 concerning the OMT programme. Furthermore, if these conditions are met, the OMT programme does not currently impair the Bundestag’s overall budgetary responsibility.
In the FT, Martin Arnold reports about estimates by Fitch according to which
European banks would have to raise up to €170bn of extra capital or sell almost €500bn of sovereign debt if regulators push ahead with plans to break the “doom loop” tying lenders to their governments …
The European Commission and the European Central Bank support steps in that direction while some European governments oppose them.
In the FT, Mehreen Khan offers a “Greek debt dilemma cheat sheet.”
In his slides, Charles Wyplosz presents a narrative that emphasizes vulnerabilities and institutional failures.
In the Irish Times, Colin Gleeson summarizes the findings and recommendations of the main Report of the Oireachtas Banking Inquiry. They are:
- Incentives were distorted.
- Banks and the property sector ran out of control.
- Regulators were too optimistic.
- “IMF favoured imposing losses on senior bond holders in October/November 2010.”
- “No Troika programme agreed in November 2010 if Government burned senior bond holders.”
- “ECB position contributed to inappropriate placing of significant banking debts on Irish citizens.”
In the FAZ, Daniel Plickert reports about a “secret” program of national central banks in the Euro zone to issue money. The Agreement on Net Financial Assets has been used since 2006 for securities purchases by national central banks, including the Bundesbank, Banque de France and Banca d’Italia.
Google does not find significant first hand online information about Anfa.