RaboResearch - Economic Research

Should the ECB consider issuing its own securities?


  • Bank liquidity has increased strongly as the result of quantitative easing
  • Central Bank Securities are tested instruments for central banks that want to mop up liquidity
  • For the ECB, the use of this instrument will bring the additional advantage of the creation of a EMU-wide ‘safe asset’, which so far is not available
  • Although this is basically a good thing, the risk sharing which is involved may meet political resistance from the member states
  • However, it may be worth investigating this policy option, as it may bring advantages for the stability of the Eurozone

This special deals with the question whether or not the ECB should consider issuing its own securities.[1] It starts with some background information. Next it explains the concept of central bank securities. Thereafter, it discusses the special circumstances in which the ECB has to operate and the challenges it would face if it starts to issue securities. Finally, I will offer some conclusions.


Since the outburst of the Great Financial Crisis in 2008, which in Europe was followed by the Eurocrisis, we have seen a drastic change in the ECB’s conduct of monetary policy. It started in 2008 with conventional measures, such as liquidity injections, but in unconventional amounts and against unconventional conditions (such as extended maturities and lighter collateral requirements). This was followed with more targeted interventions, aiming at supporting specific markets (such as the TLTRO and SMP programmes), which in turn were followed by the PSPP and CSPP (table 1). All these interventions were accompanied by a strong decrease in policy rates, to unconventionally low, viz. negative, levels.[2] 

At the beginning of 2019, the Eurosystem (the European Central Bank (ECB) and the national central banks of the Eurozone countries) stopped its purchasing programmes (PSPP and CSPP). We note that the EMU economy today is back on a path of moderate, albeit already slowing, economic growth. Furthermore, at the time of writing headline inflation is close to 2%, although core inflation rate, which is still close to 1%, is lower than the ECB’s target rate. Nevertheless, the danger of deflation in the Eurozone appears to have disappeared for the time being. The jury is still out on the question whether this recovery is the result of the ECBs interventions or not, and whether or not these benefits outweigh the purported financial stability risks. In this paper I therefore will not deeply go into the questions whether or not, or to what degree, the ECBs interventions were successful.

Table 1: The most important ECB interventions
Table 1: The most important ECB interventionsSource: ECB

The ECB was not unique with its unconventional measures. All major central banks have used large scale asset purchasing programmes when fighting the recession. But the environment in which the ECB operates is different from that of, for example, the Federal Reserve (Fed). If the Fed purchases government bonds, it buys securities that are issued by its sovereign, the government of the United States of America. The ECB, however, has no single sovereign. It is the central bank of a currency area that has no central government. When it intervenes in the bond markets, this almost unavoidably has impact on relative prices of the government bonds issued by its member states. Member states, whose governments often disagree on financial and economic matters. As a result, the ECBs interventions are politically more sensitive than that of other central banks.

Moreover, the fragmentation of EMUs public bond markets is often mentioned as one of the vulnerabilities of the Eurozone. Therefore, there has been a whole series of proposals to end this situation by the ‘mutualisation’ of debt (Muelbauer, 2013). Under these kinds of proposals, the debt of individual countries is fully or partly combined by organizing a single European Public Debt managing Office and/or private parties that replace it by structured products. Although this discussion is far from concluded, for the time being no individual proposal can count on enough political support. This special will not further dwell on this discussion. Here, it is enough to make the point that the ECB operates in an environment that is relatively complex when compared to other central banks, that usually have a one-to-one relation with a national sovereign.[3] When I use the expression ‘mutualisation’ in this text, I mean the process in which public debt of individual countries is combined in order to create a pan-national issuance of public debt.

The focus of this article is on the following questions: how can monetary conditions in EMU be normalized, which role can be played by the issuance of securities by the European Central Bank and may this have additional benefits for the stability of the Eurozone?

ECB balance sheet developments

Between January 2015 and December 2018 the ECB[4] purchased an amount of € 2,431 billion of public debt, asset backed securities, covered bonds and corporate debt. As a result, its balance sheet has grown from € 2,208 billion end 2014 to € 4,669 at the end of 2018. This is illustrated in figure 1a and 1b.

Figure 1a: Assets on the consolidated balance sheet 2007 – 2018 of the Eurosystem
Figure 1a: Assets on the consolidated balance sheet 2007 – 2018 of the EurosystemSource: ECB
Figure 1b: Liabilities on the consolidated balance sheet 2007 – 2018 of the Eurosystem
Figure 1b: Liabilities on the consolidated balance sheet 2007 – 2018 of the EurosystemSource: ECB

On the asset side of the ECB-balance, we find the securities bought by the ECB. Today, the ECB holds around 25 percent of European public debt on its balance sheet. On the liability side we see a strong increase in the reserves that banks hold at the central bank. Today, the European banks are very liquid, as they hold much more reserves than they used to do before the crisis.[5] The fact that in recent years the interbank overnight interest rate (EONIA), which in the past closely followed the ECBs most important policy rate (the refi-rate), today is very close to the ECBs deposit rate indicates over-liquidity in the banking system (Figure 2).

Figure 2: The ECB interest rate corridor and EONIA
Figure 2: The ECB interest rate corridor and EONIASource: Macrobond

As a result of the ECBs purchasing programmes, a substantial part if the public debt of the member states has been monetized. By monetizing we mean that these assets were bought by the ECB and replaced by highly liquid assets, such as money or bank reserves. Under these purchasing programmes, government expenditure has been financed by the Eurosystem, albeit ex-post. Therefore, from an economic point of view this can be regarded as a variety of monetary financing, which is strictly forbidden under the European Treaty (TFEU article 123). However, there are key differences with ‘normal’ monetary financing. The ECB has limited its interventions to the purchasing of existing debt in the secondary market, meaning that no new government spending was financed by ‘the money printing press’. From this point of view (and with a little fantasy), its actions can be perceived as a (very) large scale variety of a regular open-market operation. Secondly, its actions are meant to be temporary, although the time horizon of its interventions so far is not well-defined.

Normalization: challenge or chance?

In the years ahead, the ECB is facing the challenge to normalize its balance sheet and liquidity in the banking system. The question of course is whether this is possible without great market disruptions. It is hard to imagine that the ECB can simply sell back 25 percent of Europe’s public debt without causing a decline in public sector bond prices and accompanying increases in yields, with of course spill-over effects to other securities markets.

The ECB itself is very well aware of this situation. It has no plans yet to actively resell securities to the market. So far, it has chosen a very slow and careful, and thus time-consuming, path back to normalization. The first steps, a gradual slowdown in the pace of the purchasing programmes, were set in 2018. The second step, a full stop of (net) new purchases, was set in January 2019. The next steps are still uncertain. The ECB has for the time being decided to keep the current portfolio intact by reinvesting the maturing bonds on its balance sheet. A first next step should be, of course, to stop reinvesting and let the portfolio gradually dwindle from its balance sheet, a process that could take a decade or even more.[6] Of course, the ECB could take active action by selling part of its portfolio, but this is perceived as dangerous, as it would likely result in market volatility and declining securities prices. And in the background, of course, there is the question of the timing of the policy rate increases. The current negative deposit rate and the current flat yieldcurve may hurt bank profitability and a normalization to positive levels is important. Further increases in the policy rate above the zero level are also important, in order to create enough room for manoeuvre for future slowdowns in EMU-growth. But the feeble strength of the economy may not allow substantially higher policy rates. Therefore, here as well, the ECB is walking on eggshells and has to move very slowly. The first very careful increase of the deposit rate is not expected before the second half of 2019. Possibly even later.[7]

A question that has not been asked so far is: does this situation also offer chances to strengthen EMU and foster the international position of the euro? The answer is: probably yes. I will discuss in the remainder of this special why this may be the case.

EMU’s deficiencies

The introduction of the euro in 1999, the creation of EMU, was a major step forward in the process of European integration. At the same time, it was also clear that EMU was a half-way house. Monetary integration preceded political integration. It is beyond the scope of this special, however, to dig deeply into the discussion about political integration, creation of a fiscal union (or not) or the importance of a central fiscal capacity at EMU level. Several of these topics are discussed in Boonstra (2019b). Here, we will limit ourselves to two important themes, viz. the fragmentation of EMU’s government debt markets and, secondly, the euro’s handicaps by developing into a real world currency, that could rival the US dollar. Finally, after the crisis the ECB has become the market-maker of last resort, meaning that it has effectively killed the overnight money market. Transactions that used to run via bank-bank transactions are now conducted via the ECB. The issuance of ECB securities could help to restore the functioning of the money market as well.

Figure 3: Effective yield on EMU-government debt (%, 1999 – 2018)
Figure 3: Effective yield on EMU-government debt (%, 1999 – 2018)Source: Macrobond

The weak spots of the Eurozone were mercilessly exposed during the Eurocrisis. Markets started to speculate against the unity of the euro, sparked by remarks by politicians that some countries (i.e. Greece and Italy) would be better off by leaving the Eurozone. The fragmentation of public bond markets along national lines offered speculators the opportunity to put a crowbar in EMU, driving countries apart by increasing the spread between the financially stronger and the weaker countries. Note, however, that in the run-up to the crisis markets failed to differentiate between risks. Between 1999 and 2007 markets saw hardly any difference between the risk on Italian public bonds or their German and Dutch equivalent.[8]

After the crisis, the sharp increase in interest rate spreads on public debt within the Eurozone reflected relative performances of countries with respect to their public finances. Bond yields in financially weaker countries increased strongly, while stronger countries saw a substantial decline in bond yields. As a result the weaker countries faced a situation of low economic growth, high public deficits in combination with already a too high public debt and sharply increasing interest rates. This combination threatened to make public debt unsustainable, and these countries were refused access to finance their public deficits against affordable interest rates. Initially, it was the Securities Market Programme (SMP) of the ECB  that had to bail them out. After it appeared that the SMP was only partially successful, it was Draghi’s “whatever it takes” speech in July 2012 that changed the situation. In this speech, Draghi stated that the central bank was prepared to buy unlimited amounts public debt of member states, under the Outright Monetary Transactions (OMT) programme. In the end, the OMT were never used. Only the threat to use OMT was enough to calm markets and bring interest rates in the periphery of the Eurozone down sharply. This period was the best illustration so far of the dangers of the fragmentation of public debt in Europe.[9] This discussion is not new. Over time there have been many proposals to deal with this problem, but so far all of them have stranded on political unwillingness to tackle the problem (Boonstra, 1991, 2011, Muelbauer, 2013). But it was only after the Eurosystem de facto mutualised European public debt by taking large chunks of it on its own balance, which drove bond yields lower, that the situation further improved and the Eurozone economy started to recover.[10] The good news is that today’s situation, in which the ECB holds enormous amounts of public debt of EMU member states, also offers the opportunity to tackle the problem in a more structural way. Further good news is that this may be ‘sold’ as an unintended benefit of a regular monetary policy operation. The bad news, however, is that this nevertheless will likely hit a raw nerve with politicians. I will discuss this below.

The euro as an international currency

Figure 4: The international position of the largest currencies (2017)
Figure 4: The international position of the largest currencies (2017)Source: European Central Bank

After the introduction of the euro on the financial markets in 1999 it became immediately the second most important currency of the world. It is a major reserve currency, investment currency, payment currency, anchor currency, vehicle currency and trading currency, much larger than many other major currencies such as the Japanese yen, British pound, Swiss franc or Chinese renminbi. But, where many policymakers were hoping that the euro would challenge the dollar as the world’s leading currency,  the importance of the euro remains relatively limited when compared with its American counterpart.

During 2018, the EU has launched initiatives to further strengthen the euro compared to the dollar (European Commission, 2018). As known, the dollar is the de facto anchor currency of the global monetary system. There is quite a large literature on this situation, which brings the US certain advantages, but also at a cost.  However, it is not a very good idea to strive after a situation in which the euro has this position. For the stability of the global monetary system it would not bring many advantages and, moreover, the anchor role brings disadvantages as well, which for the Eurozone might be relatively large (Boonstra, 2019a). However, apart from this overambitious goal, it would be a good idea to increase the euro’s importance in global financial markets. Further increasing the use of the euro in international payments would be a good thing. And increasing its role as investment and reserve currency would not do any harm as well. However, here as well, the fragmentation of Europe’s bond markets is a major hindrance. There is no EMU-wide safe asset, so to say. Meanwhile, the demand for safe assets has only increased due to regulation. Would such an asset be available, this might be a great help. China, for example, has foreign currency reserves of over USD 3,000 billion. It would like to have a larger share of euro-denominated assets in its portfolio, but it is not very eager to invest in what it has once described as ‘bonds issued by European provinces’. A pan-EMU safe asset would potentially greatly improve the euro’s standing as a reserve currency.

As long as there are no Eurobills or –bonds available, securities issued by the ECB may play a positive role in tackling both issues mentioned here.  

Central banks issuing securities: how does it work?

Central bank bonds are not really new. Although the world’s most prominent central banks, viz. the ECB and the Fed, which is not allowed to issue long-term liabilities, currently do not use them, many other central banks are very active users of this instrument. Even the ECB briefly used them in its early years (1999 – 2003). However, the literature on this topic is rather limited and it is very difficult to have a complete list of central banks that use, of have used, this instrument.[11] It appears, however, that it has been relatively popular by central banks in emerging economies. I will discuss this below. Recently the Swiss central bank (SNB) has also actively issued central bank bonds in order to mop up surplus liquidity in the money market.[12]   

The balance of the central bank

Let’s begin with a look at a stylized central bank balance (figure 5).

Figure 5: A stylized central bank balance
Figure 5: A stylized central bank balanceNote: The figure concentrates on the balance sheet items that are relevant for this analysis. The rest is summarized under the label ‘other’. The numbers between brackets in the specific items correspond with the lemma’s used by the ECB. The exact description of the individual items is given in the appendix at the end of this special.

The most important items on the liability side, at least in normal times, are the bank notes in circulation and the liabilities to credit institutions. This last item covers the money banks hold as liquidity reserves at the central bank. This reflects the role of the central bank as the creator of base money (M0), including its actions as lender of last resort. It contains the money banks hold on current accounts (under the reserve requirement), the deposit facility, and the liabilities that are the result of their repo-transactions and the fine-tuning operations. 

The item debt certificates is zero today, although the ECB used this instrument to a limited extent in the early years of its existence. I will discuss later what the effects would be if this item was reactivated. Capital and reserves are present to cover losses.

On the asset side, the first items are the official reserves (gold and foreign exchange reserves). These are buffers to finance foreign exchange transactions. For major central banks, like the ECB, this post is relatively unimportant, as agents in major countries usually have access to market finance in any relevant foreign currency. For developing countries with inconvertible currencies, this item usually is more important. There, the central bank is the ultimate guarantor if a country’s obligations in foreign currency.

The lending to euro area credit institutions is related to the conventional, regular monetary policy operations.[13] The item securities held for monetary policy purposes reflect the financial assets required by the central bank under the unconventional interventions, such as the SMP, the PSPP and the CSPP.

Liquidity scarcity versus surplus liquidity

Central banks prefer to operate in an environment of liquidity scarcity. In such an environment, banks are constantly in need of central bank liquidity, which the central bank can supply at will on its own conditions. The result is that the central bank has a very tight grip on both the interbank money market rate and the size of the monetary base. It also means that the growth of the balance sheet is driven by the demand for liquidity (liability-driven), while the growth of the asset side of the balance sheet follows. The moment a central bank starts to intervene in the financial market under one of the above mentioned special programmes, it is the asset side that dictates the rate of expansion of the balance sheet. In that case, the liability side follows and, if the purchasing of securities results in a strong increase of bank reserves, an oversupply of liquidity may be the result. One of the consequences of a such an oversupply is that the central bank has less grip on the money market interest rates, which no longer follow the refi-rate, but have dropped to the floor created by the deposit rate (figure 2).[14] A further consequence is that banks, in case of a strong improvement of the market climate, have more than enough liquidity to support a strong increase in lending. Probably even too much.

Dealing with surplus liquidity

If a central bank wants to regain its grip on the money market, it has several options to reduce the oversupply of liquidity. First, of course, it can reverse its purchasing programme and start to sell securities on the market. This of course could potentially have a major negative impact on bond prices, which will result in a strong increase in interest rates. The ECB clearly has chosen to operate very cautiously here, as it is of the opinion that the economy is not strong enough to deal with substantial higher interest rates. Now that it has stopped buying securities, it intends to keep its portfolio intact for the time being, meaning that it intends to reinvest the money that it receives if bonds in its portfolio mature. Maybe, after a time, it could stop with this reinvestment policy. As a result, its investment portfolio may gradually shrink and ultimately disappear, but this will take many years. Active selling of securities is not on its agenda yet. Second, the central bank can try to decrease the degree of liquidity of the banks’ reserves by offering the banks term deposits with a longer maturity. This is what the ECB tried to do a couple of years ago, although it stopped with this policy after 2013. And, as a third option, the central bank may start to issue central bank securities. This option has the same advantage as term deposits, as it ties down liquidity, but it avoids one of the disadvantages of this last product: term deposits are not tradable, securities are. Although holdings of central bank securities usually do not count as liquidity reserve, a bank or investor can always decide to sell them on the open market. As a result, central bank securities reduce liquidity on the system level, but individual holders can always sell them in order to obtain liquidity by selling them to a bank with surplus liquidity. This in contrast to term deposits, that are non-tradeable and therefore not only reduce liquidity, but also flexibility.[15] A further side-effect is, of course, that where recourse to the ECBs balance sheet is restricted to Eurozone banks, ECB –securities can also be bought by banks from outside the Eurozone and by non-bank investors.[16]

Why should a central bank issue bonds?

As explained above, the most important reason why a central bank starts issuing bonds is when it wants to reduce or prevent surplus liquidity. The background can be quite different. In emerging markets, for example, surplus liquidity can be the result of a massive inflow of foreign capital. If such an inflow is in the opinion of the central bank too large, it can issue central bank bonds in exchange for foreign exchange. This is reflected in figure 6. This figure should be compared with the starting position of figure 5. It shows the new situation, meaning after the central bank has mopped up liquidity that was caused by an inflow of foreign capital. All other items are being kept constant.

Figure 6: Bond issuance in reaction of capital inflows
Figure 6: bond issuance in reaction of capital inflows

Figure 6 illustrates how the balance sheet of the central bank increases as result of the capital inflow. This is reflected in the increase of the gold and foreign exchange reserves (asset side). Without the intervention of the central bank, this would have resulted in an increase of the liquidity of the banking system. However, due to the issuing of central bank bonds (liability side) the liquidity of the banking system is unchanged.

In a world of free-flowing capital, this situation is quite common in emerging markets. Therefore, central banks in these countries are very regular issuers of central bank bonds. But the SNB as well acted this way from October 2008 to June 2012.

If a central banks want to reduce liquidity without selling assets, so keeping the size of its balance sheet constant, it can start issuing bonds and sell them to domestic banks. The effect is a reduction of bank reserves, compensated by an identical increase in the amount of outstanding central bank bonds (see figure 7). Again, this figure should be compared with the starting position of figure 5.

Figure 7: Reducing liquidity by bond issuance, keeping the balance sheet constant
Figure 7: reducing liquidity by bond issuance, keeping the balance sheet constant

Figure 7 illustrates that the asset side of the balance sheet is unchanged, while the central bank intervention only results in substitution at the liability side of the balance sheet, where bank liquidity is replaced by the newly issued central bank bonds. Note, that central bank bonds do not count as liquidity reserves. It is importance, however, that from a market perspective the issuance of bonds by the central banks still means that a new supply of financial assets hits the market. The situation is different, of course, compared with the situation in which the ECB sells national bonds. But it is important to have a closer look at the potential market impact.

Market impact

Once the ECB would start to issue securities, so-called ECB-bonds, this may have an impact on market rates. However, compared to the effect of the active reselling of its securities portfolio the effect may be relatively limited, although it is clear that crowding-out effects are to be expected.

Mopping up bank liquidity by issuance of ECB-bonds can probably be effectuated in a shorter timespan than doing the same thing by selling its securities portfolio.[17] The positive effect is that the ECB will sooner than in other scenarios regain its grip on the money market. Moreover, the ECB can steer the process by targeting its initial issues explicitly towards banks, although other investors can acquire them on the secondary market. ECB bonds, which may bring a positive yield, may be relatively attractive for Eurozone banks, which in the current environment have to pay to keep their reserves at the ECBs deposit facility and for which for the time being  have no reason to expect positive deposit rates any time soon. The enthusiasm for ECB-bonds, which will most likely carry a zero-risk weighting, may be substantial.

However, it also may be expected that there will be new financial inflows from abroad as foreign investors, among which central banks that want to invest in ECB bonds, being the first really EMU-wide safe asset. So there may be a new inflow of foreign exchange, being neutralized by issuance of more ECB bonds. As a result the effect on the ECBs balance sheet may be a combination of the stylized mechanisms in figures 6 and 7, viz. simultaneously a decline in bank liquidity reserves and an increase in forex reserves, to be balanced by an increase of the outstanding amount of ECB bonds.

Side effects

A first side effect could be that the euro’s importance as reserve currency may grow. This would be in line with the desire of the European Commission, that wants to increase the international role of the euro. A greater role as reserve currency may also help to develop other role, such as payment and investment currency.

A second, EMU-specific, effect would be that the de facto mutualisation of a part of EMU’s public debt may be continued for a longer time. This of course does only play in the Eurozone, the euro being the only major currency that is not backed by a single political entity. The political will to mutualize debt so far is limited, Eurobonds not being on the political agenda on this moment. Therefore, it may be clear that the issuance of ECB-bonds with certainty will revive the political debate on the pros and cons of the mutualisation of public debt in the Eurozone.

At the same time the ECBs actions already have resulted in a de facto mutualisation of public debt in the Eurozone, as an unintended side-effect of its purchasing programmes. Without these actions, the euro may have fallen apart. If the ECB would continue this situation by not selling its portfolio, but by financing it with the issue of ECB-bonds, this mutualisation would be made more or less permanent, but would not lead to more mutualisation than already is the case today.

Of course, today all EMU member states are shareholder of the European Central Bank, which means that they together guarantee potential credit losses on its portfolio. It is important that this is only the case for the part of the portfolio of the Eurosystem that is directly held by the central bank itself. The overwhelming part, over 80% of the total, was purchased by the NCBs who, as a deviation from the rule, carry the credit risk on their own portfolio of (national) government bonds. This situation would not change when the ECB starts to issue bonds up to the amount of the securities it is holding on its own balance. Which means that the potential amount of bonds to be issued by the ECB itself will remain relatively limited.

Thirdly, ECB-bonds may compete with other public debt. The arrival of a new, large issuer of a AAA-rated EMU-wide safe assets will certainly have impact on market conditions. ECB-bonds may affect the interest rates that other AAA-issuers have to pay on their national public debt. To be specific: they may directly compete with Bunds and Dutch State Loans (DSL). It will also compete with lower-rated public debt, such as Italian, Spanish or Portuguese government bonds, which may have to offer higher yields.[18]

It is difficult to foresee whether these interest rate effects are larger than under the scenario in which the ECB reduces its holdings of public debt, or not. Moreover, the price effect may be mitigated by the extra inflow of money from official investors that are attracted by the new instrument. In the end, the ECB should tread very cautiously, especially in the early stage when the market reaction is the most uncertain, limiting itself to short maturities and therefore be able to increase or reduce the size of its issuance of market conditions require this.

Concluding remarks

Although the instrument today is not used by the ECB, bond issuance by central banks is an instrument that is well-tested by several other central banks in both industrial and emerging economies. It brings several potential advantages, the most important being the possibility to reduce the supply of liquidity in the money market in a relatively short time span. For EMU, it may bring additional positive effects, such as an increase in the role of the euro as a reserve currency and a continuation of the de facto mutualisation of national public debt by the ECB. It would also bring an EMU-wide safe asset as a benchmark, which would have a major positive contribution towards the creation of EMUs capital market union. Of course, the issuance of (conditional) Eurobonds could have the same effect, without the negative impact on the prices of national public debt, as under a Eurobond programme these would be replaced by the new instrument (Boonstra, 2013, Muelbauer, 2013). But in today’s situation, Eurobonds issuance is not on the political agenda, although there are alternative initiatives around to create a pan-EMU safe assets, such as the TEF-proposal by Graham Bishop (2018). At the same time, it is clear that it does not make sense that the ECB, after saving the Eurozone with its interventions, which as a side-effect resulted in a partial mutualisation of Eurozone debt, should gradually reverse its actions. This would automatically end in demutualisation of debt and reinserting the fragilities in the Eurozone that it had to combat in the first place.

Given this background, it would be a good thing to have a closer look at the potential of the issuance of securities by the ECB. The pool of securities which is held by the central bank itself is large enough for a serious experiment. The ECB may limit the experiment to short maturities, maximum one year or even shorter, in order to minimize disturbances in the bond markets. This would bring all kinds of possibilities for learning along the way or, if necessary, even to stop the issuance programme within a short time span. But before starting, the ECB should do its homework, develop the necessary infrastructures, do more in-depth research into potential market disturbances and, if possible, create political backing for the use of central bank bond issuance. But all in all, it seems to be worth investigating.


[1] I am are very grateful to my colleagues Bas van Geffen, Elwin de Groot and Menno Middeldorp for their many helpful comments of an earlier version of this special.

[2] Hartmann & Smets (2018) offer a rich overview of the ECBs monetary policy over the last 20 years, including a detailed description of all its unconventional programmes.

[3] A further special feature of the situation under which the ECB has to conduct its policy is the prohibition of monetary financing of public expenditure. In the US and the UK, an expansive monetary policy was initially supported by expansive fiscal policies. In EMU, however, fiscal policies after the crisis in almost all member states were very restrictive.

[4] In this special I will use the term ECB as equivalent of the Eurosystem, although this is not technically not correct. However, this is justified by the fact that all decisions of the Eurosystem are made by the ECB-board. It is important to note that due to the Eurosystem’s decentralized structure, the actual operations are conducted by the national central banks. As a result, much of the purchased securities are actually on the balance sheet of the national central banks. Note, that the European System of Central Banks (ESCB) is distinct from the Eurosystem and also includes non-EMU central banks.

[5] And bank reserves are much higher that required reserves (1 percent of the deposit base).

[6] Assuming the ECB was still buying bonds with very long maturities in December 2018, it may take more than 30 years to let the portfolio evaporate entirely. But after a decade or so the bulk of its portfolio may have disappeared from its balance.

[7] Note, that the Federal Reserve started to increase policy rates long before it started to resell its portfolio. The background, of course, was a much earlier and stronger economic recovery in the US than in Europe. The Fed is already approaching the peak of its current tightening curve, earlier than the ECB have started hers.

[8] In the years before the crisis the financially weaker countries enjoyed very low interest rates on their public debt that in general did not reflect the relatively poor quality of their public finances. Most of them did not use this windfall ‘gain’ since the start of EMU to consolidate their public finances.

[9] The discussion about the pros and cons of mutualisation of public debt is beyond the scope of this special. A wrong design of so-called Eurobonds or –bills may fuel moral hazard which may seriously undermine fiscal discipline, whereas on the other hand well-designed conditional Eurobonds may stimulate responsible fiscal policies. See Muelbauer (2013) for a thorough discussion of this topic.

[10] Note that only a limited percentage of the purchased assets is acquired under full risk sharing. A large part (more than 80%) is on the balance (and for the risk) of the National Central Banks (NCBs), and thus not mutualised. So the ECB itself owns less than 20 percent of these assets. Which is still a sizeable € 400 billion of securities.

[11] Gray and Pongsaparn (2015) indicate that over 30% of central banks issue or have issued central bank securities. Among them are Chili, Thailand, Korea, Switzerland and Japan.

[12] SNB, Guidelines of the Swiss National Bank on monetary policy instruments of 25 March 2004.

[13] This item has two sub-items: the securities received as collateral under the main refinancing operations and securities received as collateral under the long-term refinancing operations.

[14] Which of course means that the ECB can still increase EONIA by raising the deposit rate.

[15] Note, however, that as with the offering of term deposits, the issuance of bonds by definition increases the maturity of the ECB’s liabilities.

[16] Currently only Eurozone banks have access to the deposit facility, which leads to rates below the deposit facility in short-term money market trades between a bank and a non-bank counterparty (i.e. corporate or pension fund). 

[17] The ECB has to develop an infrastructure to issue its own securities, which may take time. However, it has used the instrument briefly before, mopping up surplus liquidity in the early years of the Eurozone. Moreover, it can possibly draw on the experience of the SNB, which has used this instrument more recently.

[18] In South Korea, where is a decade-long experience in simultaneously issuing central bank and government bonds, they coordinate the issue calendars of the government and the central bank. (Gray & Pongsaparn, 2015). In EMU this option is not available, as there is already a large number of issuer action over the full length of the yield curve.


Bishop, G. (2018), Temporary Eurobill Fund (TEF): 30 FAQs, www.grahambishop.com, 9 May 2018

Boonstra, W.W. (1991), The EMU and national autonomy on budget issues: an alternative to the Delors and the free market approaches, in: R. O’Brien & S. Hewin (eds.) Finance and the International Economy: 4, Oxford University Press/American Express, 1990, pp. 209 - 224.

Boonstra, W.W. (2019a), The global economy needs a new currency anchor, Rabobank Special, 3 January, 2019

Boonstra, W.W. (2019b), Much can be done to strengthen EMU within the current legal framework, Rabobank Special, 8 January, 2019

Boonstra, W.W. (2013), Some Thoughts on Euro T-Bills, Rabobank Special, 29 October 2013

European Commission (2018), Towards a stronger international role of the euro, Communication from the commission, Brussels, 5 December 2018

Gray, S. & R. Pongsaparn (2015), Issuance of Central Bank Securities: International Experiences and Guidelines, Working Paper WP/15/106, International Monetary Fund, May 2015

Hartmann, P. & F. Smets (2018), The First twenty Years of the European Central Bank: Monetary Policy, ECB Working Paper No. 2219, December 2018

Muelbauer, J. (2013), Conditional Eurobonds and The Eurozone Sovereign Debt Crisis, Discussion Paper Number 681, Oxford University, December 2013.

Rule, G. (2011), Issuing Central Bank Securities, Centre for Central Banking Studies, Bank of England


Table A.1: The ECB balance sheet
Table A.1: The ECB balance sheetSource: ECB
Wim Boonstra
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 5128 1405

naar boven