The ECB’s reform of its operational framework

The ECB will soon present proposals for a reform of its monetary operational framework, that is the mechanism through which the ECB implements its monetary pol icy. The operational framework has undergone significant changes since the financial crisis , shifting from a “corridor” system, with almost no “excess” liquidity , to a “floor” system , characterized by a massive amount of excess liquidity. While there are good reasons why the ECB should cut back the amount of excess liquidity , there are equally good reasons , why a return to a system akin to the old “ corridor ” system might be undesirable and difficult to achieve in practice. For one, o perating a “ corridor ” system makes it necessary for the ECB to have a good grasp on the demand for central bank reserves. Owing to structural changes in the behaviour of money market participants, estimating the demand for central bank reserves is now arguably much more difficult. Thus, fr o m a purely implementation point of view a “floor” system seems easier to handle in the existing environment. This is not to deny that a “floor” system may have negative side effects . Keeping a significant portfolio of sovereign debt necessarily implies a bigger footprint of the ECB in financial markets and will expose the ECB to financial risks . But these adverse side effects of the “floor” system are probably perceived smaller than the advantage of a relatively easy implementation. In any case, whatever the outcome, there will be a significant transition period needed and the amount of excess liquidity will remain high for the time being.