Eurozone: EUREP, 2020

The ECB said in its initial press release announcing EUREP that it had created the facility as a precautionary backstop in order to address potential euro liquidity needs outside of the euro area during the COVID-19 lockdown. The facility was part of a larger network of central bank liquidity lines comprised of swap lines and bilateral repo lines (see Key Design Decision No. 2, Part of a Package). EUREP was unidirectional; the ECB provided euros in exchange for collateral (ECB 2020a).

The ECB originally designed EUREP as a temporary, precautionary backstop facility in the event of non-euro-area market dysfunctions and said that limited use of the facility should not have been interpreted as a sign that it was unnecessary (ECB 2022d; Panetta and Schnabel 2020). In November 2022, the ECB renewed the facility until January 15, 2024, on the basis that the facility was still needed for monetary policy purposes (ECB 2022a; ECB 2022d). As of January 17, 2023, the ECB said that EUREP was “being used in response to the uncertain environment caused by the Russian invasion of Ukraine” (ECB 2022d).

The ECB said that international liquidity provision through tools including EUREP was particularly important for ECB monetary policy transmission because it would help prevent fire sales of euro-area sovereign debt by non-euro-area governments. Such fire sales could disrupt the transmission of the ECB’s monetary policy if they were to cause the yields of sovereign debt issued by different member states to diverge substantially (Panetta and Schnabel 2020). The ECB said that these liquidity lines prevented “abrupt deleveraging, extreme price movements and interruptions in the flow of credit resulting from tensions in international funding markets” (ECB 2022d).

EUREP complemented the ECB’s main framework of euro liquidity to non-euro-area countries, which included swap lines and bilateral repo lines (ECB 2022d). Figure 4 shows the ECB’s other central bank liquidity lines as of January 2023. (See also Figure 5 at Appendix.)

Article 3.1 of Protocol (No. 4) on the Statute of the European System of Central Banks and of the European Central Bank (ESCB-ECB Statute) authorized the ECB to conduct foreign exchange operations. Specifically, Article 18.1 of the ESCB-ECB Statute authorized the ECB to engage in repurchase agreements in euros and other currencies and to lend or borrow marketable instruments. In order for a counterparty to use EUREP, its application had to be approved by the ECB Governing Council (ECB 2022c). Article 12.1 of the ESCB-ECB Statute authorized the ECB Governing Council to formulate monetary policy, including intermediate monetary objectives (European Parliament 2016).

For a counterparty to use EUREP, its application had to be approved by the ECB Governing Council. The ESCB-ECB Statute provided that authority (see Key Design Decision No. 3, Legal Authority) (ECB 2022c). The ECB publicly disclosed neither EUREP aggregate usage nor the identities of counterparties. The ECB said on an informational webpage, as of March 27, 2023, that it did not disclose any of its counterparties to EUREP (ECB 2022d). However, in the very same source, the ECB said that EUREP was “being used in response to the uncertain environment caused by the Russian invasion of Ukraine” (ECB 2022d). When contacted by the author about the facility, the ECB said that it would not disclose if the facility had ever been used at all.^FNEmail correspondence between the author and an ECB spokesperson, January 19, 2023. The ECB published a list of frequently asked questions and responses, which it last updated on December 5, 2022 (ECB 2022c). Our research was unable to uncover a fact sheet or term sheet relating to EUREP.

Owing to disclosure limitations (see Key Design Decision No. 6, Communication), our research did not uncover information about the administration of EUREP. In its 2020 annual report, the CBK said that it had gained access to EUR 100 million^FNMore than 99% of the CBK’s investment portfolio is denominated in euros; less than 1% is in dollar-denominated assets (CBK 2021). through the EUREP facility through the Deutsche Bundesbank (CBK 2021). While the CBK did not say that the Deutsche Bundesbank^FNIn its 2020 annual report, the CBK reported that of its total EUR 313 million held in current accounts at non-resident banks, EUR 127 million (40.6%) were held at the Deutsche Bundesbank (CBK 2021). was the administrator of the facility, it has acted as the administrator in other ECB bilateral repo lines in the past (Gupta 2023a; Gupta 2023b).

The ECB announced the creation of EUREP in a press release on June 25, 2020. On December 2, 2022, the ECB said in a press release that it had taken the decision in November 2022 to extend the facility until January 15, 2024 (ECB 2022a). (For an overview of the ECB’s extensions of EUREP, see Figure 2.)

The ECB said that “the mere existence” of its precautionary liquidity tools helped to stabilize markets and that the signaling effect of the ECB’s liquidity lines helped to calm market tensions (Panetta and Schnabel 2020).

In its initial press release, the ECB described the purpose of EUREP as to “[address] 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” (ECB 2020a). In its FAQs, the ECB described the purpose of EUREP as to “[reduce] risks related to episodes of euro-denominated asset sell-offs and spillovers of market dysfunctions from other economies to the euro area” (ECB 2022c). As of March 27, 2023, the ECB said that EUREP was “being used in response to the uncertain environment caused by the Russian invasion of Ukraine” (ECB 2022d).

The ECB said that a broad range of non-euro-area central banks could apply to use EUREP, although it never provided a list or disclosed which central banks it might exclude. The ECB Governing Council decided whether to grant access to a central bank on a case-by-case basis (see Key Design Decision No. 4, Governance) (ECB 2022c). In its initial press release, the ECB said that the potential counterparties were a “broad set of central banks outside the euro area” (ECB 2020a). In another blog, the ECB described the eligible counterparties as a “large range of central banks around the world” (ECB 2022d). Per the collateral requirements, any central bank applying for use would necessarily have to have adequate eligible euro-denominated collateral (ECB 2020a).

The ECB did not disclose which central banks might be excluded as potential counterparties (the words “broad” and “large range” appeared in press releases, but not “universal”). EU law prohibits transactions with some central banks.^FNFor example, in response to Russia’s invasion of Ukraine, the EU prohibited all transactions related to the Central Bank of Russia’s reserves and assets (including gold) as well as those of the central bank of Belarus. Therefore, the ECB could not legally extend EUREP access to Russia or Belarus (European Council n.d.). Also, a non-euro-area central bank could request a swap or bilateral repo line and instead receive access to EUREP, as all euro liquidity line requests are subject to the ECB Governing Council’s determination of which liquidity tool, if any, is most suitable for that particular case (ECB 2022c).

Due to disclosure limitations (see Key Design Decision No. 4, Governance), our research did not uncover information about a limit that the ECB may have set on the size of EUREP. However, the ECB did say that the size of any draws on the facility would vary depending on the amount of eligible collateral available to a borrowing central bank. According to the IMF’s Currency Composition of Foreign Reserves data, as of the third quarter of 2022, nearly 20% of the world’s foreign reserves were denominated in euros (IMF n.d.). The ECB said that such reserves included sovereign bonds issued by euro-area nations (Panetta and Schnabel 2020). In contrast to the US’s Treasury International Capital System data, the ECB does not maintain a consolidated database of foreign government holdings of euro-area sovereign debt, so estimates of size for potential counterparts were not feasible (Setser 2017).

In order to utilize EUREP, applicant (non-euro area) central banks would apply for a euro liquidity instrument and would have to be approved to use EUREP by the ECB’s Governing Council (ECB 2022c). If approved, the borrowing central bank would provide “euro-denominated marketable debt securities issued by euro area central governments or supranational institutions” as collateral (ECB 2022c).

Owing to disclosure limitations (see Key Design Decision No. 4, Governance), our research did not uncover information about the downstream use of funds, if any, from EUREP. The CBCG said that its EUREP access was in support of systemic liquidity, but it did not specify whether it would lend downstream to commercial banks or other types of financial institutions (CBCG 2022).

Due to disclosure limitations (see Key Design Decision No. 4, Governance), our research did not uncover information about the duration of draws, if any, on EUREP.

The ECB did not release details about EUREP’s rates and fees. It did say that EUREP would be priced as “slightly more expensive” than pricing under a bilateral repo or swap line and that its pricing would make it attractive only under adverse market conditions (ECB 2022c). ECB repo lines generally (to include the bilateral repo lines) applied haircuts to collateral (Panetta and Schnabel 2020).

EUREP borrowers would post euro-denominated sovereign debt (issued by euro-area governments or supranational institutions) as collateral in order to borrow euros (ECB 2020a; ECB 2022c). ECB repo lines generally (to include the bilateral repo lines) applied haircuts to collateral (Panetta and Schnabel 2020). The range of collateral for EUREP was narrower than for a bilateral repo line^FNThe ECB has limited the range of acceptable collateral for bilateral repo lines too. For example, during the Global Financial Crisis, the ECB limited the range of acceptable collateral for its repo facility with Hungary to a subset of eligible collateral under the Eurosystem operations eligibility categories (Gupta 2023a; Gupta 2023b). (ECB 2022c). Bilateral repo lines could be collateralized by any “euro-denominated financial assets” that were accepted by the ECB (ECB 2022d).

Owing to disclosure limitations (see Key Design Decision No. 6, Communication), our research did not uncover information about other restrictions on the use of EUREP.

Our research did not uncover information about options other than the existing network of swap lines and bilateral repo lines considered by the ECB to address foreign demand for euro liquidity.

The ECB last renewed EUREP on November 8, 2022, extending it until January 15, 2024 (see Figure 1 at Overview). As of January 17, 2023, the ECB said that EUREP was “being used in response to the uncertain environment caused by the Russian invasion of Ukraine” (ECB 2022d).