Central Banks

Question 1

What are the main OMO’s the ECB can do?

Answer 1

MRO and LTRO

Question 2

What does OMO mean?

Answer 2

open market operations

Question 3

What does MRO mean?

Answer 3

Main Refinancing Operation

Question 4

What does LTRO mean?

Answer 4

Long term Refinancing Operation

Question 5

What does TLTRO mean?

Answer 5

Targeted Long term refinancing operation

Question 6

What is the maturity of a LTRO?

Answer 6

3 months to 3 years

Question 7

What is the maturity of TLTRO?

Answer 7

Up to 4 years

Question 8

What is the objective of OMOs?

Answer 8

steer interest rates and control monetary mass in circulation

Question 9

What is the objective of a MRO?

Answer 9

Providing short-term liquidity to banks and pilot short-term rates

Question 10

What is the objective of a LTRO?

Answer 10

Providing medium-to-long-term liquidity to banks

Question 11

What are the criteria to access an MRO?

Answer 11

• subject to prudential supervision
• having an account at the central bank
• provide collateral (government or high-quality corporate bonds)

Question 12

How do you do an MRO?

Answer 12

You enter a reverse repurchase agreement (reverse REPO) where the ECB buys the collateral at first and the bank will repurchase it back at the end of the MRO

Question 13

What is the maturity of an MRO?

Answer 13

A week

Question 14

What are Standing Facilities?

Answer 14

Monetary policy instruments that enable the European Central Bank (ECB) to provide or absorb overnight liquidity in the financial system

Question 15

What are the different types of standing facilities?

Answer 15

• MRO
• MLF
• DF

Question 16

What is MLF?

Answer 16

Marginal Lending Facility, it’s the ceiling for interest rates in overnight narkets

Question 16

What are DFR?

Answer 16

The floor for the overnight interest rates. They’re the return banks get when they deposit money at the ECB overnight

Question 16

What is quantitative easing?

Answer 16

The ECB PURCHASES large quantities of government BONDS and other assets from financial markets thus injecting cash into the system to lower lower interest rate. LONG TERM ACTIONS AGAINST DEFLATION.

Question 16

What is DF

Answer 16

Deposit Facilities

Question 16

What is quantitative tightening?

Answer 16

The ECB SELLS large quantities of government BONDS and other assets from financial markets thus taking away cash for the system. LONG TERM ACTIONS AGAINST INFLATION.

Question 17

What are the instruments used to fight against deflation?

Answer 17

• Interest rate policy
• quantitative easing

Question 17

How to use interest rate policy to fight deflation?

Answer 17

Lowering interest rates making credits more accessible it encourages investment and spending. SHORT TERM ACTIONS AGAINST DEFLATION.

Question 17

What are the dangers of too much liquidity in the market?

Answer 17

• If the assets the ECB owns decrease in value, or the bonds default as the interest rate rises they can get looses. Creating the chance the ECB looses equity and even default itself.
• fuel inflation

Question 17

What is APP?

Answer 17

Asset Purchase Program: how many assets the ECB buys => increase liquidity

Question 17

How do you fight against inflation?

Answer 17

• increase interest rates
• quantitative tightening

Question 18

What is quantitative tightening?

Answer 18

ECB sells back the bonds they bought or lets them expire, reducing the cash in circulation