Availability of high-quality liquid assets and monetary policy operations: an analysis for the euro area
Occasional Paper Series No 218 / February 2019
Roel Grandia, Petra Hänling, Michelina Lo Russo, Pontus Åberg (editors)
While the aggregated picture shows that the availability of HQLA in the euro area financial system is substantial, the downside is that it could blur the (perceived) availability of HQLA for individual banks or banks in certain jurisdictions. For instance, as a result of risk management considerations or cross-border fragmentation, the actual demand for HQLA from certain banks could be limited to only a subset of HQLA considered as safe assets, with implications for the relative pricing of and demand for different HQLA categories. This suggests that many references to “HQLA scarcity” might actually be more accurate if they are narrowed down to a particular subset of HQLA (safe assets) based on market preferences.
An environment with less sizeable excess reserves implies that either less marketable HQLA are absorbed via monetary policy operations, making these assets again available to the market, or liquidity in excess of the banking system’s needs is absorbed via other central bank liabilities. This could in theory mean that HQLA are provided in the form of debt certificates, term deposits or reverse repos, for instance. Consequently, the overall stock of HQLA would not necessarily decrease substantially. In such an environment, however, banks, which currently hold considerable amounts of excess reserves, might need to substitute excess reserves with marketable HQLA in order to maintain their current LCR buffers. If there is a safe asset premium for the preferred marketable HQLA (e.g. highly rated government bonds), banks might need to pay a higher price compared with the current situation to hold a liquidity buffer of the same size. Consequently, the level of excess reserves could have an impact on the relative cost of holding a liquidity buffer for banks.