The response of the European Central Bank (ECB) to the economic disruptions caused by the coronavirus is the Pandemic Emergency Purchase Program (PEPP). As in the financial and European debt crisis of 2007 onwards, the massive purchase of securities by the ECB is intended to “counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus outbreak”. This article focuses on the background of asset purchase programs which can be used by institutions as a source of liquidity. In addition, this paper examines both the qualitative and quantitative differences between the PEPP and ECB’s previous purchase programs and provides an outlook on further development of this funding vehicle.
2. Purchase programs as a non-standard monetary policy instrument
2.1 Main Goals of ECB’s purchase programs
The ECB is the central bank of the Eurozone countries and its main task is to maintain price stability and thus preserve the Euro’s purchase power through the conduction of monetary policy measures. It aims to achieve an inflation rate of below, but close to, 2% over the medium term within the European Union. The ECB has various instruments at its disposal for regulating the money supply within the framework of its monetary policy which are directed at increasing and decreasing the money supply for the European Economy. More specifically, these are: open market operations, standing facilities and minimum reserve requirements for credit institutions. For completeness reasons it is important to mention that besides its monetary policy mandate ECB is also tasked with the supervision of all Eurozone banks, a function which we will not cover in this blog as is extensively elaborated in PwC’s Regulatory Blog.
ECB’s main monetary policy instruments are a variety of loans to banks collateralized with their assets, the so-called standard instruments. Since 2009, ECB has also implemented several non-standard monetary policy measures, asset purchase programs being the most important example, to complement its regular set of instruments. These vehicles are classified non-standard because they do not directly aim at reaching ECB’s goals but at ensuring that its main instruments can take effect. This is because in the Eurozone, bank financing is the prevalent source of funding for most enterprises and for almost all SME which are the backbone of the Eurozone countries’ economies. Thus, for ECB to increase or decrease money supply to the economy, banks are the most important channel for ECB’s monetary policy measures and, in order of those measures to take effect, this channel must be kept open and operative. Thus, non-standard measures such as purchase programs aim at keeping the channel operative and make sure ECB’s standard
measures take effect. Understanding the hierarchy of ECB’s measures may help in judging and maybe even predicting its monetary policy decisions.
2.2. The short history of ECB’s purchase programs
ECB’s purchasing programs have their origins in the financial crisis of 2007/2008. The first purchase program launched by the ECB was the covered bond purchase program (CBPP) to support the covered bond market which had suffered greatly from the crisis. Between July 2009 and June 2010, ECB acquired covered bonds in a total of EUR 60 billion. In a second program (CBPP2) the ECB purchased covered bonds worth EUR 16.4 billion between November 2011 and October 2012. In May 2010, and therefore in the middle of the European debt crisis, ECB started to buy securities within the securities markets program (SMP). Purchases were concentrated on countries such as Greece, Italy, Portugal, Spain and Ireland which were particularly affected by the European debt crisis. Until September 2012 the Eurosystem had bought securities of around EUR 218 billion.
The first series of purchase programs in the years 2009 to 2012 was followed in fall 2014 by a second series which the ECB combined under the asset purchase program (APP). The APP consists of four programs. As first program within the APP, the ECB introduced a Third Covered Bond Purchase Program (CBPP3) under which covered bonds with a total value of EUR 274.1 billion were purchased until March 2020 when ECB announced the PEPP. In November 2014, the ECB introduced its second purchase program with the asset backed securities purchase program (ABSPP) under which asset backed securities in the amount of EUR 31.2 billion were acquired until March 2020. In March 2015, the Eurosystem started buying marketable public debt securities under the public sector purchasing program (PSPP). Under the PSPP, in contrast to the SMP from 2010 to 2012, national central banks may only purchase securities issued by their own government. Furthermore, a fixed allocation key was introduced, based on each country’s share in the ECB’s capital. Under the PSPP, the Eurosystem’s share in the total amount of an individual issuance was initially limited to 25% and in September 2015 to 33%. As of March 2020, the total funding provided under the PSPP amounted to EUR 2,159 billion. The last program of the APP is the corporate sector purchase program (CSPP) under which the ECB started to buy corporate bonds in June 2016. As of March 2020, the ECB has acquired corporate bonds with a total value of EUR 201.5 billion.
The following Figure 1 shows the dates of introduction of the individual APPs.
To better illustrate dynamics of APP, the following diagram shows the quarterly development of the four purchase programs from October 2014 to September 2020. The chart shows a steep increase in the money supply from Q4 2014 to Q4 2017. From Q1 2018 to Q1 2020, the money supply increased only moderately. With the outbreak of the coronavirus, the ECB again significantly increased its monthly purchases. In total, the ECB has put EUR 2,957 billion into the market through its four purchase programs up to the end of September 2020.
Source: PwC research, ECB’s purchase program data.
In order to better understand the percentage distribution of individual programs, Figure 3 shows how the EUR 2,957 billion was split among the funding vehicles. The largest part of 81.32% is clearly attributable to the PSPP whereas the second largest, with 9.70%, to the CBPP3 launched in June 2016. The third and fourth largest quantities were the CSPP with 7.99% and the ABSPP with only 0.99%.
Figure 3: Percentage distribution of the EUR 2,957 billion in September 2020
Source: PwC research, ECB’s purchase program data.
2.3 Mechanics of a purchase program
Should any banking or non-banking entity wish to fund itself using an ECB’s APP, the enterprise must possess an asset which belongs to one of the asset classes ECB purchases (Sovereign Bonds, Corporate Bonds, Asset-backed Securities or Covered Bonds). The underlying risk must be at investment grade, demonstrated in most cases by one or more ratings from one of the large Credit Rating Agencies. In order to be eligible, the asset must fulfill additional eligibility criteria, such as currency or geography of the issuer and the underlying risks. Finally, for some assets a specific data disclosure must be provided to investors. Given the asset fulfills all the above, ECB will decide whether to accept the issuance under the APP and buys a predefined part of the total issuance volume.
Since APP are a monetary policy instrument aiming at keeping the credit channel of monetary policy open, ECB will neither commit to the actual magnitude of its acquisitions, nor will it publish the main target of its issuances upfront, in order to preclude investors from free-riding on ECBs APPs.
Fulfilling ECBs eligibility criteria is rarely achieved without a thorough upfront planning of the issuance. Due to this, an increasing number of assets is issued with a clear goal of using them for ECB APP. ECB executes its purchase programs through registered counterparties, mostly large banks in the Eurozone or the national central banks (NCB).
3. The PEPP as a countermeasure to the COVID-19
In March 2020, the ECB launched the Pandemic Emergency Purchase Program (PEPP) as a non-standard monetary policy measure in response to the global economic distortions and risks for the European Economic Area caused by the coronavirus. On March 24, 2020, the ECB set the duration and volume of the PEPP initially until the end of the crisis, but at least until the end of 2020 with a special funding envelope of EUR 750 billion. On June 4, 2020, the ECB extended the PEPP to June 2021 and increased the funding by another EUR 600 billion. The total volume of the package to be provided for 15 months amounts to EUR 1,350 billion which is a substantial portion of funds distributed to the economy since the start of ECB’s purchase programs.
In principle, the PEPP is an extension of the APP and its four-individual purchase programs PSPP, CBPP3, CSPP and ABSPP. Many regulatory provisions which were already in force under the APP also apply now under the PEPP. These include, among others, all asset categories which were already eligible under the APP. In addition, purchases of public sector securities within the framework of PSPP under PEPP are also made according to the allocation key based on each country’s share in the ECB capital. In contrast, the restrictions on the purchase of Greek Government securities were lifted under PEPP. Furthermore, the PEPP has been extended to non-financial commercial papers (short-term bond issued by non-financial counterparties) within the framework of CSPP.
4. Assessment of the magnitude of the PEPP
The following chart shows on the one hand the real development of the money supply of the four purchase programs of the ECB from Q4 2014 until the end of September 2020 and on the other hand an extrapolated development of the money supply from October 2020 until the end of June 2021.
Source: PwC research, ECB’s purchase program data.
Until the end of September 2020, the ECB had bought securities of EUR 2,957 billion in total under the APP. On average EUR 41 billion per month flowed into the market between October 2014 and September 2020. Shortly before the corona crisis, the money supply only developed moderately. From the beginning of 2018 until the announcement of the PEPP by the ECB in March 2020, the money supply increased by an average of just around EUR 15 billion per month. However, with the outbreak of the corona crisis followed with introduction of PEPP envelope, ECB injected into the economy a total of EUR 188.5 billion with an average EUR 31.4 billion per month between April 2020 and September 2020.
Consequently, from the total envelope of EUR 1,350 billion made available under the PEPP, only small portion was distributed so far, making EUR 1,161 billion (78.46%) still available at the beginning of October 2020. Assuming that the ECB will distribute this funds completely and equally throughout the remaining months until the end of June 2021 and also maintain the purchase ratio among the four purchase programs as of September 2020 (PSPP accounted for 81.32% of the EUR 2,957 billion by September 2020, CBPP3 for 9.70%, CSPP for 7.99% and ABSPP for 0.99%), one can forecast the future distributions as depicted in Figure 4. Having this assumption said, we expect an average of EUR 129 billion to be made available to the market per month until the end of June 2021. The highest phase as of today has occurred between April 2016 and March 2017 with an average of EUR 79.7 billion per month. The highest sum so far spent in a single month was EUR 85.4 billion in November 2016. Overall, the PEPP will enable the ECB to increase liquidity provision to the European economy amounting for 315% of the average money spent on monthly basis throughout the APP history prior the COVID-19 pandemic.
— What does this mean to me as SME/bank?
With the PEPP as a liquidity vehicle, the ECB provides the economy with funds of an unprecedented magnitude. Within a little more than one and a quarter year, another EUR 1,350 billion will be given to the capital markets when measured from March 2020 until the end of June 2021. When compared to the money supply of EUR 2,623 billion that ECB allocated to the economy over the past six years (October 2014 – February 2020), the outbreak of the COVID-19 triggered a precise 51.46% increase of funding channeled to the market through PEPP.
We view the steps taken by the ECB positively and remain convinced that the funds made available through the funding programs will support and speed up the post COVID-19 recovery. In fact, this stimulation has been recognized by many banking and non-banking institutions as an opportunity to sell their eligible assets to the ECB as the demand from their investors declined. Our PwC research shows increased activity in ABS market where new originators try to enter the market with an aim to structure an eligible ABS transaction that can participate in ECB’s purchase programs. We also see an increased number of SME engaging into structuring a debt issuance with a special attention to CSPP eligibility as their traditional investors tend to be now more risk averse. Since the release date of a properly tested COVID-19 vaccine is still unknown, we view the ECB’s efforts as appropriate and supportive. In fact, our past projects where we advised and supported several banking and non-banking institutions proved that ECB’s funding provide the bank or non-bank entity with a valuable extension of its funding potential, allowing the realization of business opportunities in times of reduced market activity. A test of whether ECB funding can successfully act as a substitute for market financing in the whole of Europe has not yet been required and we observe no signals to the contrary.
In order to better understand the structure, eligibility criteria of individual programs and how your business can benefit from them, please do not hesitate and contact your PwC experts. Our team has developed an effective and transparent tool that allow a quick assessment of legibility of given asset for ECB’s APP and PEPP and thus allowing market participants to achieve their full funding potential.
 Cour-Thimann, Philippine / Winkler, Bernhard (2013): The ECB’s Non-Standard Monetary Policy Measures – The Role of Institutional Factors and Financial Structure, No 1528 / April 2013, Oxford et al.
 129 billion divided by the average 41 billion between October 2014 and September 2020 under the assumption that the ECB will distribute the remaining 1,161 billion evenly over the next nine months.