Since March 2020, the European Central Bank (ECB) and the European Union have announced several major economic stimulus programmes and policy measures to protect businesses, consumers and institutions in the eurozone from the effects of the coronavirus. The ECB and the EU, in particular, are more limited in what they can do compared to sovereign countries, such as the U.S. and U.K. and their own member states.
European Central Bank
The following is the myriad ways in which the ECB has responded to the COVID-19 pandemic.
Pandemic Emergency Purchase Programme (PEPP)
On 18 March the ECB announced the launch of a €750 billion Pandemic Emergency Purchase Programme (PEPP) that will buy private and public sector securities until the crisis ends, but through at least the end of 2020. Eligible securities will follow the bank's existing asset purchase programme (APP). Greece was granted a waiver to participate in the programme.
The ECB said it "will do everything necessary within its mandate. The Governing Council is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed."
Indeed, on 4 June the bank announced it was increasing the size of PEPP by €600 billion, to €1.350 trillion, and said the programme would be open until at least June 2021, a six-month extension. At the same time, the bank's asset purchases through its existing APP will continue at €20 billion a month, meaning that the two programmes combined will purchase €120 billion of securities a month at least through the end of 2020.
On 27 March the ECB asked banks under its jurisdiction not to pay dividends to their shareholders or repurchase shares at least until October 2020 in order to preserve capital. It also asked banks to withhold any dividends for 2019 that had not yet been paid.
On 28 July the ECB extended its dividend recommendation, calling on banks to withhold dividends and share buybacks until January 2021. The bank said it would revisit its dividend policy recommendation in the fourth quarter of 2020.
The ECB also asked banks to be "extremely moderate" in paying bonuses to their employees, and to consider deferring such payments or paying them out in stock rather than cash.
The bank also said it would not require banks to start replenishing their capital buffers or liquidity coverage ratios until at least 2021.
Pandemic Emergency Longer-Term Refinancing Operations (Peltros)
On 30 April the ECB said it would conduct seven additional longer-term refinancing operations called pandemic emergency longer-term refinancing operations (PELTROs) to provide liquidity support to the financial system and preserve the smooth functioning of money markets during the pandemic.
Bank Capital Requirements
On 12 March the ECB announced temporary capital and operational relief measures for banks in order to support the economy. Banks will be allowed to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR). Banks will also be allowed to partially use capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital, such as Additional Tier 1 or Tier 2 instruments, to meet the Pillar 2 Requirements (P2R).
The ECB also said it would adjust schedules, processes and deadlines for bank examinations, such as rescheduling on-site inspections and extending deadlines for the implementation of any remediation actions.
On 20 March 2020 the bank announced additional "flexibility" on bank supervision, specifically the way banks handle and classify non-performing loans.
Eurosystem Repo Facility (EUREP)
On 25 June the ECB announced a new Eurosystem repo facility for central banks (EUREP) to provide "precautionary" euro repo lines to central banks outside the eurozone. The new facility, which will be available until June 2021, "addresses possible euro liquidity needs in case of market dysfunction resulting from the COVID-19 shock that might adversely impact the smooth transmission of ECB monetary policy."
On 21 July 2020, the European Union approved an US$860 billion package called "Next Generation EU" that includes US$450 billion in grants and US$410 billion in loans. The programme will be financed by bonds issued by the EU, rather than by individual governments of its member states, the first time the EU has done so.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…