The European Central Bank published an ECB Blog post assessing how euro area banks and money markets have adjusted one year after the Eurosystem announced changes to its operational framework amid a normalising balance sheet. The post concludes that the framework is working as intended, with short-term money market rates anchored around the deposit facility rate and banks largely meeting liquidity needs through market sources rather than Eurosystem refinancing. Excess liquidity has fallen by more than EUR 2 trillion from its November 2022 peak to EUR 2.8 trillion, while reserves remain unevenly distributed across banks. The framework continues to steer policy via the deposit facility rate, and standard refinancing operations now provide reserves at 15 basis points above the deposit facility rate, down from 50 basis points previously, with full allotment against a broad collateral set. A confidential survey of bank treasurers indicates most banks still hold reserves above internal targets, but 40% are already operating close to internal liquidity coverage ratio and net stable funding ratio targets, reinforcing the role of high-quality liquid assets and term funding in liquidity management. Repo rates have moved closer to the deposit facility rate, and around 15% of repo volume trades above it, which the post links mainly to dealer intermediation demand rather than reserve scarcity. Banks have also increased term market borrowing, including a EUR 100 billion rise in term commercial paper, while term repos used to generate and redistribute high-quality liquid assets have grown tenfold to nearly EUR 350 billion and represent 14% of outstanding repo transactions. Looking ahead, the post expects demand for standard refinancing operations to rise as reserves decline further and notes the importance of continued smooth functioning of money markets and bank readiness to use Eurosystem operations in day-to-day liquidity management.
European Central Bank 2025-04-25
European Central Bank blog concludes the new operational framework is functioning as intended as excess liquidity declines
The European Central Bank's blog evaluates euro area banks' adaptation to the Eurosystem's revised framework, noting effective anchoring of short-term money market rates around the deposit facility rate. Excess liquidity has decreased by over EUR 2 trillion, with banks increasingly meeting liquidity needs through market sources. The post anticipates rising demand for standard refinancing operations as reserves decline, emphasizing the importance of money market functionality and bank readiness for Eurosystem operations.