The Eurosystem’s instruments

To implement the ECB’s monetary policy, the Eurosystem uses the following set of instruments:

• Open market operations
• Standing facilities
• Minimum reserve requirements for credit institutions

All these instruments are based on the Eurosystem legal framework for monetary policy instruments, which consists of the “General framework” and the “Temporary framework”. The Temporary framework complements, amends or overrules the General framework.

Participation

Our monetary policy framework strives to ensure the participation of a broad range of eligible counterparties. In the case of standing facilities and tender open market operations, only credit institutions that are subject to minimum reserves and fulfil all the necessary eligibility criteria are eligible to participate. For outright transactions, there are no a priori restrictions on the range of counterparties.

Open market operations

We use our open market operations to inject or absorb liquidity in the financial system as needed to steer short-term interest rates closely in line with the Governing Council’s monetary policy decisions. Our regular open market operations to provide liquidity in euro currently consist of the main refinancing operations with a maturity of one-week and longer-term refinancing operations with a maturity of three-month operations.

Open market operations are initiated by the ECB. In this way, the ECB decides on the instrument and its terms and conditions. As further explained in the General framework, it is possible to execute open market operations on the basis of standard tenders, quick tenders or bilateral procedures. The Eurosystem may conduct them as reverse transactions or outright transactions, or it may issue debt certificates, conduct foreign exchange swaps or collect fixed-term deposits.

Types of open market operation

Open market operations can differ in terms of aim, regularity and procedure.

• Main refinancing operations (MROs) are regular reverse transactions that provide liquidity, usually with a frequency and duration of one week. They are executed in a decentralised manner by the national central banks on the basis of standard tender procedures and according to an indicative calendar published on the ECB’s website. MROs have been conducted through fixed rate tender procedures with full allotment against broad collateral since 2008. 
• Longer-term refinancing operations (LTROs) are reverse transactions that provide liquidity for a longer duration than MROs. Regular LTROs have a maturity of three months and are conducted monthly by the Eurosystem on the basis of standard tender procedures in accordance with the indicative calendar on the ECB’s website. LTROs have been conducted through fixed rate tender procedures with full allotment since 2008.

  The Eurosystem may also conduct other longer-term refinancing operations, with a maturity of more than three months. In recent years, such non-regular open market operations have had maturities of up to 48 months – these include very long-term refinancing operations (VLTROs) and targeted longer-term refinancing operations (TLTROs). Such longer-term programmes are aimed at providing eligible counterparties with additional longer-term refinancing and can also serve other monetary policy objectives.

• Fine-tuning operations can be executed on an ad hoc basis to manage the liquidity situation in the market and to steer short-term interest rates. In particular, they are aimed at smoothing the effects on interest rates caused by unexpected liquidity fluctuations. Fine-tuning operations are primarily executed as reverse transactions but may also take the form of foreign exchange swaps or the collection of fixed-term deposits. The instruments and procedures applied during fine-tuning operations are adapted to the types of transaction and the specific objectives pursued in performing the operations. Fine-tuning operations are normally executed by the Eurosystem through quick tenders, and a limited number of eligible counterparties may be selected to participate.
• Structural operations can be carried out by the Eurosystem through reverse transactions, outright transactions and issuing debt certificates. These operations are executed whenever the ECB wishes to adjust the structural liquidity position of the financial sector vis-à-vis the Eurosystem (on a regular or non-regular basis). In March 2024, the Governing Council of the ECB decided that new structural LTROs and a structural portfolio of securities will be introduced once the Eurosystem balance sheet begins to grow durably again, taking into account legacy bond holdings. These operations will make a substantial contribution to covering the banking sector’s structural liquidity needs arising from autonomous factors and minimum reserve requirements. The structural refinancing operations and the structural portfolio of securities will be calibrated in accordance with a set of principles that the Governing Council also decided on this occasion and to avoid interference with the monetary policy stance.

Open market operations Asset purchases

Standing facilities

Standing facilities aim to provide and absorb overnight liquidity and to signal the general monetary policy stance and bound overnight market interest rates. The standing facilities, which are administered in a decentralised manner by the national central banks, are available to eligible counterparties on their own initiative.

Marginal lending facility

Eligible counterparties can use the marginal lending facility to obtain overnight liquidity from the national central banks, against the provision of adequate eligible collateral. The interest rate on the marginal lending facility normally provides a ceiling for the overnight interbank market interest rate.

Deposit facility

Eligible counterparties can use the deposit facility to place overnight deposits with the national central banks. The interest rate on the deposit facility normally provides a floor for the overnight interbank market interest rate and thus anchors short-term wholesale money market rates. The Governing Council decided in March 2024 that it will continue to steer the monetary policy stance through the deposit facility rate., Short-term money market interest rates are expected to evolve in the vicinity of the deposit facility rate with tolerance for some volatility as long as it does not blur the signal about the intended monetary policy stance. Eligible counterparties receive the deposit facility rate for the funds placed in the deposit facility, unless the deposit facility rate is negative, in which case it also applies to current account holdings in excess of minimum reserves.

Standing facilities

Minimum reserves

The ECB requires credit institutions established in the euro area to hold a certain amount of funds on their accounts with their respective national central bank. These funds are called “minimum reserves” or “required reserves”.

The minimum reserve system is meant to stabilise money market interest rates and potentially create (or enlarge) a structural liquidity shortage.

The ECB does not require credit institutions to hold the total amount of required reserves in their account at the central bank every day. Rather, they should hold these required reserves on average, based on their daily holdings, over a maintenance period of about six weeks.

The amount credit institutions should hold is determined by certain elements of their balance sheet, in particular customer deposits with a maturity of up to two years.

The respective reserve maintenance periods start on the settlement day of the main refinancing operation following each Governing Council monetary policy meeting.

The required reserves are remunerated at 0%.

Excess reserves, i.e. current account holdings in excess of the minimum, are remunerated at the deposit facility rate or 0%, whichever is lower. The ECB may exempt part of the excess reserves from the deposit facility rate remuneration. This was the case with the implementation of the two-tier system for remunerating excess reserves. 

Minimum reserves Two-tier system for remunerating excess reserves