ECB offers euros to non-eurozone central banks

The European Central Bank is set to open a facility allowing non-eurozone central banks to borrow euros, using sovereign debt as collateral.

The ECB’s governing council designed the new repo facility, Eurep, as a “precautionary backstop to address pandemic-related euro liquidity needs outside euro area”, it said in a statement today (June 25). Eurep will remain available until June 2021, and access to its repo lines will require the governing council’s approval.

The council said Eurep would contribute to the smooth transmission of eurozone monetary policy. The scheme would cut the risk of “sell-off episodes of euro-denominated assets and spill-overs of market dysfunctions from other economies”, the ECB said.

Eurep will work as a complement to the ECB’s existing bilateral swap lines. The bank had long-standing swap lines with the central banks of the US, Japan, the UK, Canada and Switzerland.  

In response to the Covid-19 crisis, the ECB also set up swap lines with the National Bank of Denmark, the National Bank of Croatia and the Bulgarian National Bank.

Earlier in June, the ECB unveiled a repo line with the national Bank of Romania. Through this instrument, it grants euro liquidity to non-eurozone central banks in exchange for euro-denominated collateral.

The ECB said it intends Eurep to be used only during periods of acute crisis such as the ones unleashed by Covid-19.

Eurep is “a backstop facility, which means that its pricing is chosen in a way that makes it attractive only under adverse market conditions”, the ECB statement said. “While Eurep is accessible to a broad range of non-euro area central banks, the pricing of Eurep is slightly more expensive than under a bilateral repo or swap line and the range of collateral is narrower than under a bilateral repo line.”

The only instruments the ECB will accept as collateral are securities issued by central governments and supranational organisations.

ECB follows Fed programme

Eurep’s framework is similar to the role played by the Federal Reserve’s Fima repo facility. This allows international central banks and monetary authorities with accounts at the Federal Reserve Bank of New York to enter into repurchase agreements with the Fed. Through Fima, these institutions temporarily exchange their Treasuries held at the Fed for dollars.

The new facility was a response to the acute liquidity shortage experienced in March, when US Treasury yields rose as the Fed sharply lowered rates and re-started asset purchases. Investors and central banks responded by prioritising access to dollar cash-selling Treasuries, as the global economy entered an unprecedented paralysis.

For the first time, the Fima facility allows central banks to access dollars without having to sell Treasuries in the open market. Many market observers say the Fima scheme has contributed to re-stablish the normal functioning of financial markets.