Back to the future

The headline news from today’s Bundesbank financial stability review is about the €90bn in further write-downs it expects from German banks. But there are some insights on Bundesbank thinking on monetary policy as well – although Axel Weber, Bundesbank president, was not at the press conference to elaborate.

In particular, the Bundesbank favours an eventual return to “variable rate tenders” in liquidity-providing operations, in which the European Central Bank determines the amount of liquidity injected into the bank system. Since the collapse of Lehman Brothers it has, instead, been matching banks’ bids in full at a fixed interest rate.

As such, the Bundesbank has highlighted an emerging consensus at the ECB that, once its “exit strategy” is completed – which may not be for some time – its operating system should look pretty much as it was before the crisis.

José Manuel González-Páramo, an ECB executive board member, said as much in a speech in London earlier this month. He noted that “prior to the escalation of the financial crisis in September 2008, the operational framework worked well”. The ECB would “seek to revert” to a situation in which the principal tool for steering money market operations was the weekly main refinancing operation. It should also act as “rate-takers” in the longer-term money market – as it was before, when it set the volume available in three-month operations, and the actual rate varied according to the level of bidding.

That might disappoint those hoping for a revolution at the ECB in which it takes advantage of the crisis to introduce a new system. But evolution is still possible. Like all wise central bankers, Mr González-Páramo left an escape clause by saying that (my emphasis added) “one should envisage a situation in which the main operational features that were in place prior to the crisis are restored, while of course also bearing in mind the lessons learned from the crisis.”

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