In a Reuters interview, Isabel Schnabel, member of the Executive Board of the European Central Bank (ECB) said that the ECB will discuss the different options available to provide liquidity to the banks, including longer-term operations.
“But such a facility would have to be different from the targeted longer-term refinancing operations (TLTROs) we were offering during the pandemic, in that it would have to be offered at market rates. From the banks’ perspective, longer-term lending operations are attractive because they provide a certain reliability of funding. And they reach all parts of the banking sector directly. That is very different from asset purchases – when you inject liquidity, it typically ends up with the larger banks and in certain financial centers,” she said.
When asked about the ECB’s timeline for the balance sheet to shrink to its optimal size, Schnabel said it depends on various factors that can’t be projected perfectly.
“It also depends on the framework that we will eventually choose. One of the main drivers of the size of the central bank balance sheet is the growth of what we call autonomous factors – banknotes and official sector deposits – and the growth of reserve requirements. These factors already imply that the balance sheet is going to be around three times as large as before the global financial crisis.
“In addition, banks could have a higher demand for excess liquidity for regulatory or precautionary reasons. If the outcome of the review was a demand-driven system, the size of the balance sheet would thus also depend on banks’ demand for excess liquidity. This would mean the size would not be determined by us, which is a good thing, because we don’t know precisely what the demand is.”