The risks of a contraction stemmed chiefly from two factors: first, the possibility that money markets would deteriorate to the point of compromising banks’ access to them; and second, banks’ possible reluctance to assume fresh risks in the form of loans against a backdrop of enormous economic uncertainty. To tackle the first of these risks, the ECB launched a line of longer-term refinancing operations (LTROs). These provided banks with “bridge financing” under advantageous terms until end-June 2020, at which point there would be a major liquidity auction. This measure contributed to stabilising the banking sector’s financing costs in the initial phase of the pandemic. As to the second risk, the ECB already had an instrument to encourage banks to extend credit: the aforementioned TLTROs. This programme grants banks financing under particularly favourable conditions, provided they meet targets for granting credit to households and firms. With the onset of the pandemic, this programme was recalibrated to make it more attractive to banks, allowing them temporarily to obtain financing at an interest rate as low as -1%, on condition they did not reduce their volume of eligible lending. Also, given that banks participating in Eurosystem refinancing operations must offer collateral to obtain liquidity, we decided to ease the collateral framework conditions so that they could obtain a greater amount of financing in these operations. The measures adopted included most notably reducing the average haircut applied to the value of the collateral and accepting higher-risk assets as eligible, including loans backed by the national authorities’ various programmes.

Thirdly, the importance of the ECB’s flexibility as regards the recalibration and use of instruments should be highlighted. By way of illustration, the evolution of the economic crisis caused by the pandemic required an increase in the PEPP in June of € billion, and of € billion in December, up to a total of € trillion. The net purchase horizon was also extended until at least end-March 2022 and the maturing securities reinvestment horizon until at least end-2023. 4  In December we also decided to recalibrate the conditions of the TLTROs. We extended by 12 months, until June 2022, the period during which the reduced interest rate for banks meeting the lending target will be applicable, scheduling three additional quarterly operations between June and December 2021, and increasing the borrowing allowance of TLTRO funds each bank can obtain from 50% to 55% of its eligible loans. Another of our decisions was to extend until June 2022 the aforementioned collateral framework flexibility measures. But apart from this flexibility in the response over time, there is a key difference in the PEPP compared with the previous asset purchase programme (APP). Whereas the APP retains a relatively rigid structure regarding the distribution of asset purchases both over time and across jurisdictions, the PEPP afforded itself from the outset the possibility of concentrating these purchases in the most critical months of the crisis and in the countries which, at each point in time, have been subject to tighter financing conditions.