See Chapter Two, Market Liquidity—Resilient or Fleeting? International Monetary Fund, Global Financial Stability Report, October 2015.
This Technical Note was prepared by Robert Sheehy, IMF External Expert as part of the 2016 FSAP of Germany. The mission would like to thank the German authorities, EU authorities and market participants for their excellent cooperation and open dialogue.
Baba, Naohiko, Robert N. McCauley and Srichander Ramaswamy, U.S. Dollar Money Market Funds and Non-U.S. Banks, BIS Quarterly Review, March, 2009.
Nagel, Joachim, The Consequences of an Ineffective Money Market, Revue d’économie financière, No. 111, September 2013.
Kofner, Stefan, The German Pfandbrief System facing the Financial Crisis, European Network of Housing Research papers, 2010.
Düwel, Cornelia, Repo Funding and Internal Capital Markets in the Financial Crisis, Deutsche Bundesbank Discussion Paper 16/2013, March 2013, pp. 5-8. Initially, repo funding could be replaced by other short-term financing, but alternative sources also dried up after the Lehman Brothers failure.
Four banks (IKB, Westdeutsche Landesbank, Bayern Landesbank and Sachsen Landesbank) received capital injections, credit lines and asset-backed security loss guarantees between August 2007 and September 2008. The large resources needed for the rescue of Hypo Real Estate at end-September 2008 made it clear that the more systematic approach provided by SoFFin was required.
Hüfner, Felix, The German Banking System: Lessons from the Financial Crisis, OECD Economics Department Working Paper 788, July 2010.
ECB Press Release, Monetary Policy Decisions, October 8, 2008.
Van Rixtel, Adrian, and Gabrielle Gasparini, Financial Crises and Bank Funding: Recent Experience in the Euro Area, BIS Working Paper 406, March 2013, pp. 10 ff.
The ECB launched its first covered bond purchase program in 2009 and a second in 2011. A more general securities market purchase program was initiated in 2010. Purchases under the covered bond programs were not sterilized.
The impact in Germany has been particularly marked. The yield on every German benchmark bond with maturities up to six years is already negative, and the 10-year bond yield fell to 0.075 percent in April 2015; the current 10-year yield is about 0.5 percent.
Deutsche Bank owned 93.7 percent of outstanding shares of Deutsche Postbank as of end-2014. Deutsche Bank announced in April 2015 that it intends to reduce its Postbank holdings to less than 50 percent of outstanding shares.
DZ Bank and WGZ Bank have recently announced their intention to merge, with a target for completion by end 2016.
In addition to the stresses on funding markets, negative interest rates also pose special challenges for derivative markets, as most mathematical models used for pricing derivatives do not allow for negative rates.
The short-term money market trades negotiable certificates of deposit, bankers acceptances, commercial paper, repurchase agreements, Treasury bills and other short-term instruments.
European Fund and Asset Management Association (EFAMA), International Statistical Release, September 2015.
U.S. Securities and Exchange Commission, Division of Investment Management, Money Market Fund Statistics, September 2015.
Fitch Ratings, U.S. Money Market Funds Quarterly, various issues.
ECB Statistical Data Warehouse, Aggregated Balance Sheet of Euro-Area Money Market Funds.
Mai, Heike, Money Market Funds—An Economic Perspective, Deutsche Bank Research Paper, February 26, 2015.
International Capital Market Association (ICMA), European Repo Market Survey, various issues.
The standard repurchase contract is the Global Master Repurchase Agreement (GMRA), published by the International Capital Market Association. An optional supplementary condition in the 2011 version of the GMRA would set the repo rate to zero in the event of a failure to deliver, and would give the buyer the right to terminate a failed transaction at any time.
The decline was due to both the abolition of state guarantees for such bonds from 2001 and the removal of debt of countries under financial stress from cover pools following the euro crisis. Werner, Ralf and Manuela Spangler, Germany Covered Bonds: Overview and Risk Analysis of Pfandbriefe, Springer Briefs in Finance, 2013, p. 26.
One large European bank has recently announced that it intends to relinquish its primary dealerships and cease making markets for all European government bonds owing to stricter regulatory requirements and a slump in trading income due to low interest rates.
There is some discussion of the possibility of including long-term export finance and infrastructure loans as eligible assets for covered bond pools.
Verband Deutscher Pfandbriefbanken—VDP (Association of German Pfandbrief Banks), Pfandbrief market statistics.
European Covered Bond Council, ECBC Covered Bond Comparative Database.
The Danish covered bond market is reportedly experiencing a decline in liquidity in the secondary market owing to the impact of both the LCR and negative interest rates on local repurchase markets, which are the traditional source of finance for market makers for the bonds.
In the case of sovereign bonds there is an additional limit of 33 percent of an issuer’s outstanding securities, after consolidating holdings in all of the portfolios of the national central banks. For covered bonds, the 70 percent issue share limit is also applied after consolidating holdings in all of the portfolios of national central banks.
The adequacy of the existing guarantee funds in the event of insolvency of one of the Landesbanken is assessed in the FSAP Technical Note on “Crisis Preparedness, Bank Resolution and Crisis Management Frameworks.”
Bundesverband Deutscher Banken (Association of German Banks), The Deposit Protection Scheme.
Deutsche Bundesbank, PSPP Securities Lending, Press release, October 2, 2015.