In a speech at the ECB Conference on Money Markets 2025, European Central Bank Executive Board member Isabel Schnabel described the Eurosystem’s balance sheet run-down as “quantitative normalisation” that has so far proceeded smoothly, with banks maintaining strong liquidity positions and excess liquidity still abundant. She linked the ECB’s March 2024 operational framework to a future balance sheet that is more responsive to banks’ liquidity demand and more heavily driven by collateralised lending, and she set out an instrument sequence in which persistent take-up of standard refinancing operations precedes the launch of structural longer-term refinancing operations and, later, a new structural securities portfolio. Since the balance sheet peak in 2022, monetary policy-related asset holdings have fallen by 45% over three years; following the full repayment of targeted longer-term refinancing operations at end-2024, securities accounted for more than 70% of assets while loans to banks were below 1%. Over the past three years, reserve supply fell by more than EUR 2 trillion, but banks offset part of the decline by buying government bonds, keeping liquidity coverage ratios for significant institutions broadly stable. The framework’s fixed-rate full allotment standard refinancing operations and a 15 basis point corridor between the main refinancing operations rate and the deposit facility rate were presented as central to ensuring liquidity is always available on demand while limiting rate volatility and decoupling the pace of balance sheet run-off from short-term rate control. Looking ahead, ECB staff scenario analysis was cited as putting possible demand for excess reserves between EUR 600 billion and EUR 2.2 trillion; Schnabel argued that, even at the low end, relying only on short-term operations would create operational and collateral-encumbrance risks, implying a role for structural operations. Structural LTRO design was framed as a trade-off between longer tenors that reduce rollover and provide regulatory benefits for banks and the reduced agility and potential crowding-out of market funding. For a future structural securities portfolio, she highlighted policy stance neutrality, preserving policy space for potential future long-duration purchases, and financial soundness considerations, concluding these factors favour a tilt towards shorter maturities. She noted that these remarks reflect her current thinking and that the Governing Council will start reviewing key parameters of the operational framework in the course of 2026.
European Central Bank 2025-11-06
European Central Bank’s Schnabel outlines future reserve-supply sequence and backs shorter-maturity structural securities portfolio
At the ECB Conference on Money Markets 2025, ECB Executive Board member Isabel Schnabel discussed the Eurosystem’s balance sheet reduction as "quantitative normalisation," highlighting strong bank liquidity. She outlined a future balance sheet responsive to banks' liquidity demand, emphasizing collateralised lending and refinancing operations. Schnabel noted ECB staff scenario analysis suggests a demand for excess reserves between EUR 600 billion and EUR 2.2 trillion, advocating for structural operations to mitigate risks.