[22] Just recently, the Eurosystem adjusted the pricing of the securities lending programme as of November 2020,[23] to reflect changes in euro area repo market conditions since December 2016 and to ensure that the Eurosystem securities lending facilities remain an effective backstop. This pricing adjustment has resulted in a pronounced increase in the ECB’s securities lending activity as measured by the outstanding balance of securities on loan. Counterparty feedback received to date suggests that the new pricing does not constitute a material change in policy but might help to alleviate some pressure in the repo market ahead of the year-end. There are two other factors that have further alleviated collateral scarcity after December 2016. First, the set of securities eligible for APP purchases was expanded in January 2017. Second, anecdotal evidence suggests that the use of private securities lending operations has increased. [24] The conference paper by Jank, Moench and Schneider (2019) investigates the re-use of collateral in response to scarcity induced by the Eurosystem’s large-scale asset purchases. [25] Since March 2020, excess liquidity and the size of the Eurosystem balance sheet have increased further, driven by the implementation of additional asset purchases under the PEPP and the APP, as well as the allotment of the TLTROs. Although the increase in asset purchases since March was substantial, scarcity effects have not become more pronounced. [26] Most importantly, COVID-19 related fiscal measures have led to a higher supply of government bonds, thus mitigating the effect of asset purchases on collateral scarcity.

In particular, the tensions in the commercial paper market also affected the term unsecured money market, not least because commercial paper rates are often used as a reference for the pricing of EURIBOR under the hybrid methodology. The Eurosystem reacted decisively to the tensions in financial markets that extended well beyond the money and commercial paper market. We launched additional liquidity-providing operations for banks against an expanded set of collateral via targeted longer-term refinancing operations (TLTROs) at highly favourable rates, longer-term refinancing operations (LTROs and PELTROs) as well as foreign currency liquidity arrangements (swap and repo lines). In addition, the Eurosystem sharply expanded its purchases of public and private sector assets, which also included purchases of commercial paper, under the Pandemic Emergency Purchase Programme (PEPP) and the Asset Purchase Programme (APP). [13] The Eurosystem’s policy interventions effectively eased the liquidity strains observed in the spring of 2020 and supported market functioning by ensuring ample liquidity support for banks and stopping selfreinforcing fire-sale dynamics in key financial market segments, such as investment and money market funds. [14] The interventions have had a sustained effect on money markets in the euro area. Both EURIBOR and commercial paper rates have continued to recede in recent months and are currently at historically low levels. [15] The yield curve in unsecured money markets has flattened substantially even compared to the pre-crisis period (right-hand side of Slide 5). These low money market rates support the Eurosystem’s highly accommodative monetary policy stance.