ECB: Quantitative Easing Or Tightening?
Antonio Fatas | Sep 15, 2014 06:22AM ET
Charles Wyplosz at VoxEU questions the potential effectiveness of quantitative easing (QE) as recently announced by the ECB. His main concern is that the ECB version of QE is supply driven, as opposed to the one implemented by the other central banks which is demand driven.
In the case of the US Federal Reserve or the Bank of England, the central bank buys securities and those securities permanently increase the size of the bank's balance sheet. Liquidity is provided regardless of the actions of commercial banks. In contrast, the ECB so far had always relied on the demand from commercial banks for liquidity. The ECB made loans available to commercial banks, and as long as commercial banks demanded those loans, the balance sheet of the central bank also increased (with the deposits of commercial banks being the liability that appears on the other side). But this means that in many ways commercial banks are driving QE. It is their desire to hold more liquidity the one that determines the expansion (or contraction) in the size of the ECB balance sheet.
To understand these dynamics, here are some charts from the ECB web site. First the total size of the balance sheet of the ECB.
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In the last months the ECB has tried to be more aggressive, first with the launch of targeted long term refinancing operations (TLTRO) back in June. But the details of this plan are still unclear (does anyone remember it?) plus it relies once again on the willingness of commercial banks to lend to the private sector and finance this lending via the central bank. But we just saw commercial banks returning all the liquidity that they had previously borrowed from the ECB. Why will the ask for more?
In the last meeting, the ECB announced a change in strategy with the plan to purchase asset-backed securities. While in some sense this is the first time where the ECB will engage in supply-driven QE (no loans associated to these purchases), the wording of the plan has left many questions open about the extent to which this is a "permanent-enough" commitment to increase the ECB balance sheet and, in addition, the potential volume of these purchases could be small. Small enough that they will not be compensating the fall in the ECB balance sheet that we have witnessed in the last year.
Unfortunately, the ECB is likely to face soon the same question it has faced over the last years: what is next?
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