The Deutsche Bundesbank has outlined its position on managing the structural liquidity needs of the banking system in a recent report. The focus is on how the European Central Bank (ECB) is to meet the higher demand for central bank liquidity from banks once the current overliquidity stemming from crisis-related bond purchases is reduced.
Key Statements from the Bundesbank
- Structural refinancing operations as the main instrument: The Bundesbank proposes covering the majority of the structural liquidity needs through so-called structural refinancing operations. These longer-term tender procedures enable banks to obtain liquidity against collateral for a specified duration.
- Interest tender procedures: The well-known interest tender procedure could be used more intensively again, as the banking system recently had a surplus of liquidity.
- Bond purchases only for residual demand: Bond purchases should only occur when the potential of refinancing operations is fully utilized, while adhering to the prohibition of monetary financing of the state.
- Reaching more monetary policy partners: Structural refinancing operations reach more money market participants than securities purchases, thereby having a broader impact.
Effects on Interest Rates and Monetary Policy
The increased use of tender procedures for providing liquidity can lead to fluctuations in short-term market interest rates. Depending on the design of these operations (e.g., fixed rate vs. variable conditions) and their demand, this can influence interbank interest rates. Targeted refinancing operations enable the ECB to directly control the volume and cost of provided liquidity – a central element for monetary policy management.
Timeline and Next Steps
The Bundesbank emphasizes that these operations should only be introduced when the banking system no longer has a structural surplus of liquidity. The ECB Council plans to review the monetary policy framework by the end of 2026, taking into account the experiences with the new instruments.
In summary, the Deutsche Bundesbank sees structured refinancing operations, particularly through tender procedures, as a suitable means to cover future structural liquidity needs in the Eurosystem. These measures could help make monetary policy impulses more broadly effective than previous securities purchases and offer new possibilities for fine-tuning in the money market.