The current ECB/Eurosystem framework has been effective in responding to market strains, but a more comprehensive, forward-looking and harmonized framework would be helpful in supporting the monetary, banking and capital markets unions.
The ECB/Eurosystem’s current framework is an accumulation of decisions made during a prolonged period of market stress. As market conditions normalize, it will be important to embed a framework that supports progress towards euro area -wide capital markets. For example, changes to securities lending arrangements were necessary and effective to alleviate strains brought about by ECB/Eurosystem purchases, but operations are still conducted on a different basis in each jurisdiction. The ECB’s view is that the current set-up strikes a good balance between harmonization and adjustment to local market conditions, but the market’s perceptions are that arrangements fall short of a more market efficient centralized system. Harmonizing securities lending arrangements would further support euro area-wide market functioning, and help align EA risk free rates which would be positive for the smooth transmission of monetary policy. Similarly, the re-introduction of non-loss sharing arrangements for ECB/Eurosystem repurchase operations goes against the positive step taken through the creation of the Single List of collateral.
The full report is available at https://www.imf.org/~/media/Files/Publications/CR/2018/cr18229.ashx