ECB Watch

2 min read
Divyang Shah

It’s hard to see how we are going to fit corporate bond purchases to the long list of policy acronyms already in use by the ECB that includes LTRO, VLTRO, TLTRO, CBPP1, CBPP2, CBPP3 and ABSPP.

Clearly the market reaction suggests that including corporate bonds into the mix of asset purchases would be a significant departure from the ECB’s usual script.

Corporate bond purchases would be confirmation the ECB has shifted from an instrument-based approach to policy and focused instead on expanding its balance sheet. Clearly the size of the corporate market at €1.4trn is significantly larger than the €1trn theoretical size for covered bonds and ABS.

The question, as always, is whether buying quality assets that the market/banks already want to own is a substitute for buying risky assets that are less liquid and require holding more risk capital – which would likely free banks to promote lending.

Until now the ECB has made it clear that its policies are designed for a bank-based financial system. The inclusion of corporate bonds would herald a significant shift from targeted credit easing toward attempting to expand the ECB’s balance sheet back to early 2012 levels.

ECB

ECB Balance Sheet