Factbox: What's left in the tank for the big three
Send a link to a friend
[March 20, 2020] (Reuters)
- The world's top three central banks have
deployed an array of weapons to fight the profound economic threat posed
by the global coronavirus pandemic, increasingly seen as likely to spur
the first outright contraction in the world economy since the 2007-09
Many have also cut interest rates significantly and rolled out new or
enhanced measures such as asset purchases, liquidity facilities and hard
pledges not to raise rates for a long time.
Here is a rundown of some remaining tools or steps the largest banks
could still take to fight this crisis.
U.S. FEDERAL RESERVE
- TAF - The Term Auction Facility acts as a kind of discount window, the
Fed's funding source of last resort, without the stigma that banks hate
so much. The TAF, rolled out in 2008 to combat the financial crisis,
auctioned funds to banks so they could make loans. The Fed could
relaunch this program under the "unusual and exigent" clause of the
Federal Reserve Act, with the sign-off from the Treasury secretary.
- TALF - The Term Asset-backed Loan Facility is another financial-crisis
era tool that could succeed in getting funds into the hands of small
businesses and even households. The facility would bundle loans made to
businesses and consumers into asset-backed securities that would then be
sold to investors.
- CORPORATE BONDS - As Boston Federal Reserve Bank President Eric
Rosengren has already suggested, the Fed could consider adding
investment grade corporate bonds to the assets it purchases with its QE
program, which is currently limited to U.S. Treasuries and
mortgage-backed securities. This would require new authorization from
Congress, something the Fed itself has said it is not seeking at this
- YIELD CURVE CONTROL – Borrowing a page from the Bank of Japan, the Fed
could employ YCC to ensure that bond yields that serve as important
benchmarks for consumer and business lending do not rise to levels that
begin to choke off credit. Fed Governor Lael Brainard has expressed some
interest in such a program, under which the Fed would tailor its
purchases toward certain maturities of U.S. Treasuries to keep yields on
those where the Fed desires.
- NEGATIVE RATES - The Fed has shown no interest in following its some
of its peers into the realm of negative interest rates.
EUROPEAN CENTRAL BANK
- QE - Having made clear that self-imposed purchase limits will not
stand in its way, the ECB could still increase bond buys further after
already pledging to buy up to 1.1 trillion euros worth of debt this
- OMT - The ECB could activate its never-used crisis fighting tool
called outright monetary transactions or OMT. It would allow the ECB to
target purchases towards a particular country. A precondition for OMT is
that the country must be in a bailout program. However, even a
precautionary credit line could qualify under certain conditions. The
drawback is that IMF involvement must also be sought. The are no
quantitative limits placed on OMT.
- WIDEN ACCESS TO LIQUIDITY - The ECB could open its balance sheet to
shadow banks to provide them liquidity. While any such move is unlikely
to involve all non banks, some experts have advocated extending ECB
liquidity to insurers and pension funds. While Europe used to be a bank
finance-based economy, the share of shadow banks is rising quickly.
[to top of second column]
Federal Reserve Board building on Constitution Avenue is pictured in
Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo
- RATES - Although the ECB has made clear that there is little appetite for any
further deposit rate cuts, it could further cut rates on its liquidity
operations, which would serve the same purpose. Its longer-term refinancing
operation will be remunerated at minus 0.75% and this could even go lower.
- NEW ASSETS - The ECB could increase the range of assets it buys to include
things like ETFs. It currently buys sovereign debt, covered bonds, asset backed
securities, commercial paper and investment grade corporate bonds.
- HELICOPTER MONEY - This would involve giving cash directly to euro area
residents although it is generally seen as crossing into the realm of fiscal
policy. Most see it as a last resort.
BANK OF JAPAN
- RATES - The BOJ may take its short-term interest rate, now at -0.1%, deeper
into negative territory, or accompany the move with a cut to its 0% long-term
rate target. That would be aimed at lowering the cost of borrowing for companies
and staving off an unwelcome yen rise that hurts Japan's export-reliant economy.
But many BOJ policymakers are wary of doing this on concern over narrowing
interest margins for banks.
- STRENGTHEN FORWARD GUIDANCE - This is seen as a more acceptable policy option.
It now pledges to maintain or cut interest rates as long as the economy faces
risks that hamper achievement of the BOJ's 2% price goal. It could tie the
forward guidance more directly to its price target, or commit to cutting rates
under certain circumstances. It is unclear how effective this could be given
markets already expect rates to remain ultra-low for the foreseeable future.
- REVERT TO QE - The BOJ's current yield curve control is a policy mainly
targeting interest rates. Reverting to QE would mean ditching YCC and creating a
new policy framework, no easy task. Years of heavy asset buying by the BOJ has
also drained liquidity from the Japanese government bond market. Even if the BOJ
reverts to QE, the amounts can buy will be limited.
- HELICOPTER MONEY - The BOJ could directly underwrite bonds sold by the
government to help finance huge fiscal spending. That would go against law
prohibiting the BOJ to bank-roll government debt, although it already gobbles up
most newly issued bonds from the market. So the distinction may not matter much
any more. BOJ Governor Haruhiko Kuroda has said the BOJ's yield cap already
helps the government boost spending by keeping borrowing costs low, and has
shrugged off the chance of adopting helicopter money.
(Reporting by Howard Schneider in Washington, Balazs Koranyi in Frankfurt, and
Leika Kihara in Tokyo; Compiled by Dan Burns; Editing by Nick Tattersall)
[© 2020 Thomson Reuters. All rights
Copyright 2020 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.