The Valuation Haircuts Applied to Eligible Marketable Assets for ECB Credit Operations

41 Pages Posted: 29 Mar 2023

See all articles by Martin Adler

Martin Adler

European Central Bank (ECB)

Gonzalo Camba-Méndez

European Central Bank (ECB)

Tomislav Džaja

European Central Bank (ECB)

Andrés Manzanares

European Central Bank (ECB)

Matteo Metra

European Central Bank (ECB)

Giorgio Vocalelli

University of Verona

Date Written: March, 2023

Abstract

In implementing its monetary policy, the ECB conducts collateralised credit operations with banks. The bulk of the financial risks involved in these collateralised credit operations are mitigated primarily by the valuation haircuts imposed on the mobilised collateral. Since the establishment of the euro in January 1999, valuation haircuts have been formulated mainly on the basis of risk management considerations and have been systematically calibrated with a very low level of risk tolerance. However, their implied risk tolerance may sometimes be used as a monetary policy stance lever, as clearly illustrated when the ECB decided to reduce haircuts to improve funding conditions for the real economy during the outset of the coronavirus (COVID-19) pandemic. In addition, the ECB ensures that financial market developments warranting general methodological changes are incorporated into the calibration of valuation haircuts adequately and in good time. In a particularly challenging economic environment, the ECB has also recently committed to ensuring that climate change risks are considered when calibrating the valuation haircuts applied to corporate bonds. Against this background, the purpose of this paper is to provide an overview and explanation of the main guiding rules, as well as explaining some of the statistical methods currently employed by the ECB when formulating valuation haircuts. Keywords: monetary policy implementation, risk control framework of credit operations, valuation haircuts

Keywords: monetary policy implementation, risk control framework of credit operations, valuation haircuts

JEL Classification: D02, E58, G32, Q54

Suggested Citation

Adler, Martin and Camba-Méndez, Gonzalo and Džaja, Tomislav and Manzanares, Andrés and Metra, Matteo and Vocalelli, Giorgio, The Valuation Haircuts Applied to Eligible Marketable Assets for ECB Credit Operations (March, 2023). ECB Occasional Paper No. 2023/312, Available at SSRN: https://ssrn.com/abstract=4403663 or http://dx.doi.org/10.2139/ssrn.4403663

Martin Adler (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gonzalo Camba-Méndez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tomislav Džaja

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andrés Manzanares

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matteo Metra

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giorgio Vocalelli

University of Verona ( email )

Via dell'Artigliere, 8
Verona, 37129
Italy

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