Having injected €2.5 trillion ($2.8 trillion) into the eurozone economy over the past four years, the European Central Bank finally called time on its expanded asset purchase programme (EAPP) in December 2018. Monthly purchases had already slowed from a peak of €80 billion in 2016 to just €15 billion by the end of last year, and the ECB declared it would now keep inflation on target through more conventional measures.
One of the consequences of the programme has been that, as the ECB has bought growing quantities of government bonds, the volume of those instruments available in the secondary market has fallen, thereby reducing liquidity. Securities lending has become an increasingly important tool for central banks to bring assets back into the market where there is sufficient demand. Experienced agent lenders such as Deutsche Bank play an important role in this process.
“Traditionally, for central banks, the primary rationale for participating in securities lending has been to promote the orderly functioning of, and liquidity in, secondary markets. This is in contrast to many lenders, where yield generation is the primary motivation to enrol their assets in securities lending,” says Jay Schreyer, head of agency securities lending (ASL) for Europe, the Middle East and Africa and Asia-Pacific at Deutsche Bank.
“For a number of the central bank mandates entrusted to us as agent lender, we see our role as being part of a transmission mechanism between the lender’s asset portfolio and the end borrowers with their diverse demand requirements,” he adds.
Central banks have long been a core constituent of Deutsche Bank’s ASL business, making up around 40% of the aggregate client base, alongside pension funds, sovereign wealth funds and mutual funds. These entities tend to have large investment portfolios, and turn to borrowers such as Deutsche Bank that can be relied upon to find buyers and sellers for their securities when needed.
The ASL business currently serves a diverse pool of central banks, scoring a major success with its vital support for the ECB’s bond purchases over the past three years. Since April 2015, the ECB has made the holdings of securities purchased under the public sector purchase programme (PSPP) available for securities lending, with Deutsche Bank acting as lending agent. Holdings purchased under the securities markets programme and the covered bond purchase programmes have also been made available for lending since 2015.
“When the ECB and the Eurosystem national central banks embarked on quantitative easing, they looked to securities lending to ensure that adverse liquidity issues did not arise in the bond and repo markets for the underlying securities that were being acquired under these measures. In accomplishing this aim, the EAPP securities lending arrangements are designed not to unduly curtail normal repo market activity,” adds Schreyer.
Multiple channels are available to Eurosystem central banks to mitigate the impact of bond purchases, including bilateral securities lending, lending via specialised agents such as Deutsche Bank and the lending services of international central securities depositories.
Flexibility and commitment
Deutsche Bank provides EAPP securities lending to five Eurosystem monetary authorities, comprising the trading, risk, operations, compliance, legal and reporting infrastructure that enables each agency to fulfil its objectives without unduly reducing liquidity. The lending programme ensured calmer market conditions during the typically volatile year-end accounting period in 2017 and 2018, and central banks praise Deutsche Bank’s flexibility and commitment.
“We were looking for a simple and effective way of making our assets purchased under the PSPP more accessible to the market participants, thus supporting bond and repo market liquidity, and ensuring smooth implementation of our PSPP securities lending programme. Deutsche Bank has been very efficient and flexible, and we have been satisfied with the quality of client service and reporting,” says Aleksandras Rosinas, head of the payments and settlements division at the Bank of Lithuania.
We have lending programmes in place with several providers, and Deutsche stands out in quality, flexibility and pricing, and we are very happy with the service. On at least two occasions, we changed certain lending conditions, and the process was very well co-ordinated and quickly executed
Senior official at a eurozone central bank
A senior official at another eurozone central bank is similarly positive: “We have lending programmes in place with several providers, and Deutsche stands out in quality, flexibility and pricing, and we are very happy with the service. On at least two occasions, we changed certain lending conditions, and the process was very well co-ordinated and quickly executed.”
As the main vehicle for sourcing and financing government bonds, the repo market plays an important intermediation role in the financial system, supporting liquidity in the bond market and allowing investors to finance long positions and borrow securities to deliver into short positions.
Volatility in short-term repo rates changes market-based financing conditions for banks and their conditions for trading with firms and households. This means repo rates have become a primary channel through which changes in monetary policy are transmitted to broader financial markets and the real economy.
“Deutsche Bank is very conscious of the positive impact that central bank securities lending activities – and particularly the systemic importance of the EAPP securities lending programmes – have in promoting orderly repo and bond markets, thus supporting an improvement in economic conditions across the eurozone region. These are important altruistic outcomes that we consider in conjunction with the bank’s wider shareholder goals when we extend our support as a service partner to central banks globally,” says Schreyer.
Deutsche Bank’s support for the EAPP was the extension of an existing partnership with the ECB, and the bank was the natural choice to develop the securities lending programme. Having proven its ability to deliver tailored mandates that reconcile to the specific regulatory and risk parameters of individual clients, Deutsche Bank’s ASL business has set itself aside from other agent lenders in recent years.
“Our proprietary technology and operating model flexibility enable clients to configure their participation in a manner that delivers sustainable and compliant risk-adjusted returns across a diversified range of counterparties and an expansive series of indemnified collateral options, from sovereign debt to equities, underpinned by the enterprise risk management resources of Deutsche Bank,” Schreyer tells Central Banking.
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Joel Clark, William Towning and Tristan Carlyle