Christine Lagarde: IMFC Statement
Statement by Ms Christine Lagarde, President of the European Central Bank, at the forty-first
meeting of the International Monetary and Financial Committee, IMF Virtual meetings,
Washington DC, 16 April 2020.
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The coronavirus (COVID-19) pandemic is a truly global challenge. Countries all around the world
are having to deal with its severe human and economic consequences. In the euro area, we
have taken decisive action to mitigate the impact of the crisis over recent weeks. However, a
global challenge of this nature also needs to be met with global solutions.
Euro area developments and outlook
In the euro area, incoming economic data, particularly recent survey results, have started to
show unprecedented falls, pointing to a large contraction in output in the euro area, as well as to
rapidly deteriorating labour markets. Uncertainty is sharply elevated and will remain high, making
it extremely difficult to predict the likely extent and duration of the imminent recession and
subsequent recovery. Inflation is currently low, largely reflecting the recent sharp decline in
energy prices. Looking ahead, headline inflation is expected to decline further in the near term,
while the implications of the coronavirus crisis for inflation over the medium term are surrounded
by high uncertainty.
Latest monetary policy decisions
Against the background of a profoundly weaker economic outlook for the euro area as well as
deteriorating and more fragmented financial conditions, the ECB's Governing Council took bold
and decisive policy action in March to combat the negative effects of the coronavirus shock in
order to counter the serious risks to the monetary policy transmission mechanism, the outlook
for the euro area and price stability.
In order to prevent financing conditions from tightening and exacerbating the downturn, we
sizeably stepped up our asset purchases. We scaled up our net asset purchases under the
existing Asset Purchase Programme (APP) and launched the Pandemic Emergency Purchase
Programme (PEPP), a new temporary asset purchase programme for private and public sector
securities. Overall, asset purchases will add a total amount of €1.1 trillion to our portfolio by the
end of 2020. To target our purchases to the specific shock and contingency at hand, we
expanded the range of eligible assets under the corporate sector purchase programme to
include non-financial commercial paper. Moreover, purchases under the PEPP will be made in a
flexible manner, thereby allowing the distribution of purchases to vary over time, across asset
classes and jurisdictions to ensure the smooth transmission of monetary policy to those sectors
and regions that need it most.
To protect the continued flow of credit to the real economy, considerably more favourable terms
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will apply to all TLTRO III operations outstanding between June 2020 to June 2021. In particular,
this should benefit lending to small and medium-sized enterprises.
We have also introduced additional longer-term refinancing operations (LTROs) to ensure that
there is sufficient liquidity in the financial system. This should support banks in the current phase
of heightened uncertainty.
Finally, we have taken a number of collateral easing measures to ensure that banks have
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sufficient collateral to participate in the Eurosystem's liquidity operations. We have increased
our risk tolerance to support bank funding against loans to corporates and households. This will
be achieved by expanding the use of credit claims as collateral and through a general reduction
in collateral valuation haircuts.
The Governing Council is committed to doing everything necessary within its mandate to help the
euro area through this crisis. It is fully prepared to increase the size of its asset purchase
programmes and adjust their composition, by as much as necessary and for as long as needed.
It will explore all options and all contingencies to support the economy through this shock.
Euro area banking sector developments
Thanks to the efforts made after the global financial crisis, euro area banks now have more
robust capital and liquidity positions than they did in 2008, with sufficient capacity to absorb loan
losses similar to those seen in the wake of that crisis. Together with national authorities, we have
also taken supervisory and macroprudential measures to enhance the euro area banking
sector's ability to absorb losses and provide necessary support to the real economy. The
possibility of operating below the level of capital defined by the Pillar 2 Guidance, as well as the
immediate implementation of rules on the composition of Pillar 2 Requirements under the new
Capital Requirements Directive V, will provide capital relief of €120 billion that will enable banks to
finance loans to households, small businesses and corporate customers. Through the release of
countercyclical capital buffers, systemic risk buffers and buffers for systemically important
institutions, macroprudential measures are contributing a further €22 billion of capital. We have
also recommended that banks neither pay dividends nor buy back shares until at least October
2020, a move which would retain approximately €30 billion of capital. The current measures
imply using the flexibility that is built into the existing framework in order to help the banking
sector weather these difficult economic circumstances. We remain committed to fully
implementing the Basel standards under the revised timeline. We are by no means backtracking
on the progress in strengthening the regulatory and supervisory framework that has been made
since the previous financial crisis. With regard to future actions, the ECB is continuously
monitoring developments - also from a macroprudential perspective - and assessing the need
for additional steps, including the further release of buffers or measures to support their usability.
We also continue to closely monitor non-bank financial institutions. Some investment funds have
been experiencing significant outflows since the outbreak of market volatility, but the ECB's
recent policy actions have helped to improve conditions. In particular, following our decision to
expand private sector asset purchases to non-financial commercial paper, outflows from euro
area money market funds have been stemmed. These events also emphasise the importance of
extending macroprudential frameworks beyond banking over the medium term.
European responses to the coronavirus shock
Fiscal and structural policies should be targeted at enhancing the European countries' capacity
to deal with the economic and social impact of the coronavirus pandemic and to support the
subsequent economic recovery. We welcome the initiatives already taken by European
governments and European institutions to ensure sufficient healthcare resources and to provide
support to affected companies and employees. These will help in securing employment and
safeguarding the survival of productive firms. We also welcome the provision of credit
guarantees. Such actions should help to complement and reinforce the unprecedented monetary
policy measures taken by the ECB's Governing Council in response to the crisis.
International responses to the coronavirus shock
As national authorities take the necessary steps to fight the pandemic, global cooperation and
resource sharing across nations remain vital. Addressing international trade disruptions,
preserving trade openness and assuring the flow of vital medical supplies and other goods and
services across borders is of paramount importance in helping to contain the economic fallout
from the outbreak.
Further international efforts will be needed to counter the consequences of the outbreak and
spread of the coronavirus. The ECB supports the crisis-response measures by the IMF, notably
the adjustments to its emergency lending toolkit and the creation of a short-term liquidity line for
countries with strong macroeconomic fundamentals. We are also open to exploring a possible
new special drawing rights (SDR) allocation for all IMF members. The October 2019 package on
IMF resources needs to be implemented speedily to help maintain the IMF's lending capacity of
USD 1 trillion.
Major central banks, including the ECB, have taken coordinated action to enhance the provision
of US dollar liquidity. The ECB has also agreed to swap line arrangements with some EU central
banks to provide euro liquidity and is assessing further requests for euro-providing swap lines in
line with its mandate.
Going forward the international community will need to cooperate closely, learn from each other
with respect to the effectiveness of the various policy responses, share information and
coordinate policy actions, also when lifting containment measures, so as to help bring about a
swift return to sustainable global growth and preserve an open global economy.
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Targeted Longer-Term Refinancing Operations, offering banks long-term funding at attractive conditions, to
preserve favourable borrowing conditions for banks and stimulate bank lending to the real economy. The
interest rate applied is linked to the participating banks' lending patterns.
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Further information on the APP, the LTROs and TLROs can be found here, on the PEPP here and on the
collateral easing measures here.