The European Central Bank (ECB) guaranteed this Thursday, 6th, that banks in the euro zone have liquidity in euros always available when they need it, at a time of scarcity of liquidity in the financing markets in US dollars.
Allocating liquidity at a fixed interest rate in standard refinancing operations “ensures that liquidity is always available when banks need it”, ECB executive committee member Isabel Schnabel said at the 2025 money markets conference organized by the ECB.
After the outbreak of the global financial crisis, with the collapse of the US bank Lehman Brothers in September 2008, the ECB began lending to banks weekly through a full award procedure at a fixed interest rate, so that banks can borrow all the money they need and do not need to bid for liquidity as they did before the financial crisis.
Full adjudication frees the ECB from having to calculate the reserves needed to bring short-term money market interest rates up to the reference interest rate.
If reserves are provided primarily through asset purchases, as the U.S. Federal Reserve (Fed) does in the U.S., the central bank must calibrate carefully because interest rates could skyrocket in the money market if there is a liquidity shortage, Schnabel said.
The Fed last week had to inject large amounts of liquidity into US banks due to tensions in the dollar money market, after saying that the decline in key rates in December was not guaranteed and that it is finishing reducing its balance sheet.
Schnabel considered that the ECB’s quantitative normalization is occurring in an orderly manner in the euro zone.
Eurozone banks have strong liquidity positions and excess liquidity in euros is abundant, according to the German economist.
After having purchased public and private debt from the euro zone for years, the ECB withdraws liquidity to the extent that it no longer buys securities, nor reinvests the principal of previously acquired securities.
The ECB, according to Schnabel, hopes to completely reduce the portfolio of bonds acquired for monetary policy reasons, with which it lowered long-term interest rates,
“Unless monetary policy considerations require new asset (bond) purchases at some point in the future,” Schnabel said.