Ulrich Bindseil

European Central Bank · DG Market Infrastructure and Payments

While Bitcoin raised the attention for the potential of distributed ledger technology (DLT), it fails to deliver on its promises but comes at high costs. It is unfitted and inefficient as a means of payment but used extensively for illicit activities. It is unsuitable as an investment asset and neither empowers, nor relieves the sovereign individua...

In this chapter we turn to representing flows of funds in alternative international monetary frameworks, and what global liquidity these different frameworks provide. We first recall some arguments in favour of and against fixed exchange rate systems. We then introduce two international monetary arrangements of the past which imply fixed exchange r...

This chapter introduces conventional monetary policy, i.e. monetary policy during periods of economic and financial stability and when short-term interest rates are not constrained by the zero lower bound. We introduce the concept of an operational target of monetary policy and explain why central banks normally give this role to the short-term int...

In this chapter, the central bank is put aside and we review simple models of financial instability, which will be the basis for the subsequent chapter to explain the role of the central bank as lender of last resort. We first recall that financial instability is mostly triggered by a negative shock on asset prices, and thereby on the solvency of d...

This chapter develops further the role of a central bank and its interplay with commercial banks. Together, the two ensure the provision of liquidity to the economy, such that the real sectors are shielded from flows of funds originating from household and investors. We also disaggregate the banking system into two banks to represent deposit flows...

In this chapter we review the function of the central bank as lender of last resort (LOLR), starting from the understanding of financial crises developed in the previous chapter. We recall long-established LOLR principles: proactive lending, inertia of the central bank risk control framework, and risk endogeneity. Because of its systemic role, a ce...

This chapter introduces the reader to unconventional monetary policy, i.e. monetary policy using instruments going beyond the steering of short-term interest rates as described in the previous chapter. We start by providing the rationale of unconventional monetary policy, i.e. essentially pursuing an effective monetary policy when conventional poli...

This chapter introduces the system of accounts of the main sectors of the economy (households; non-financial corporations, the government; banks, and the central bank), describing how these sectors are interrelated through financial claims and liabilities. A financial system, consisting of commercial banks and the central bank, manages flows of fun...

Contrary to popular belief, the history of central banking begins much earlier than 1800. Many current issues of central bank policy can be traced back to the public giro banks of the 15th century, and have been discussed in numerous essays at least since the 17th century. Are the same debates merely repeating themselves in new shapes? And, more im...

This open access book gives a concise introduction to the practical implementation of monetary policy by modern central banks. It describes the conventional instruments used in advanced economies and the unconventional instruments that have been widely adopted since the financial crisis of 2007–2008. Illuminating the role of central banks in ensuri...

Bank's asset fire sales and recourse to central bank credit are modelled with continuous asset liquidity, allowing to derive the liability structure of a bank. Both asset sales liquidity and the central bank collateral framework are modeled as power functions within the unit interval. Funding stability is captured as a strategic bank run game in pu...

The prospect of central bank digital currency has raised concerns over its potential to cause structural (i.e. permanent) or cyclical (i.e. crisis-related, temporary) bank disintermediation. Moreover, negative interest rate policy is incompatible with the unconstrained supply of zero-remunerated central bank digital currency. This column argues tha...

The role of central bank money in payments is key to the monetary and financial architecture of an economy. While the topic has been debated for centuries,1 the main reference for today’s central bankers remains a report prepared in 2003 by the Committee on Payment and Settlement Systems – now called the Committee on Payments and Market Infrastruct...

During the 20th century, a view established itself, according to which (a) defining central banking would be difficult, (b) the Sveriges Riksbank (established in 1668) and the Bank of England (established in 1694) would have been the first central banks, (c) although at that time central banks did not have a policy mandate and no concept of central...

The Introduction describes the main themes and objectives of the book and provides an overview of its content. First, the current dominant view on the origins of central banking is recalled and challenged, and it is outlined what alternative view this book will propose, namely that central banking dates back to before 1800 and that a number of Euro...

IT progress and its application to the financial industry have inspired central banks and academics to reflect about the merits of central bank digital currencies (CBDC) accessible to the broad public. This paper first briefly recalls the advantages that have been associated with such a CBDC and reviews some relevant background from the history of...

These are lecture notes for a one semester course given at Technical University Berlin. I want to thank the students for spotting mistakes and insightful discussions that helped to improve the text. The focus of this introduction is on the actual financial operations of central banks, and in particular monetary policy operations, and the interactio...

In some recent studies, the question of the origins of central banking has been revisited, leading to the conclusion that beyond Swedish and British central banking, also a number of earlier European continental central banks would have played a more important role. However, it has been often difficult to access the charters and regulations of thes...

The article discusses what monetary policy implementation framework and techniques should be envisaged for the new normal, i.e. after the large part of the non-standard operations currently still impacting the central bank balance sheet and liquidity conditions would have matured. First, the main reasons why this new normal should be expected to be...

Section 5.1 presents a one-day model of the overnight rate with three distinct interbank trading sessions and three distinct autonomous factor shocks. Section 5.2 models the case of reserve requirements with averaging and a three-day reserve maintenance period with one interbank session and one autonomous factor shock each day. The effects of centr...

Since 2007, central banks of industrialized countries have counteracted financial instability, recession, and deflationary risks with unprecedented monetary policy operations. While generally regarded as successful, these measures also led to an exceptional increase in the size of central bank balance sheets. The book first introduces the subject b...

In 1988 Basil Moore published his book Horizontalists and Verticalists: The Macroeconomics of Credit Money, which this year celebrates its 25th birthday. We discuss this book from today’s perspective, and in particular whether Moore’s main assertions have been validated or rejected by the development of central bank practice and academic monetary e...

This paper analyzes dual liquidity crises, i.e. funding crises which encompass the private and the public sector, and the shock absorbing capacity of central banks within a closed system of financial accounts. We find that a central bank that operates under a flexible exchange rate is most effective in containing a dual liquidity crisis. A central...

This paper contributes to the literature on liquidity crises and central banks acting as lenders of last resort by capturing the mechanics of dual liquidity crises, i.e. funding crises which encompass both the private and the public sector, within a closed system of financial accounts. We analyze how the elasticity of liquidity provision by a centr...

This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks’ funding liquidity and solvency. Both asset liquidity and central bank haircuts are modeled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors....

The TARGET2 (T2) positions on the balance sheets of several euro-area national central banks increased considerably since the beginning of the European sovereign debt crisis in 2009. This unprecedented increase attracts more and more the attention of professional economists and the public media. Yet, despite the large amount of available informatio...

 A large number of German economists have spoken out against the package of aid measures provided by the Member States of the European Union and the International Monetary Fund (IMF) for the countries within the euro area that have been facing severe financial difficulties. This includes in particular the opinion of 189 German economists on the EU...

Basel III introduces for the first time an international framework for liquidity risk regulation, reflecting the experience of excessive liquidity risk taking of banks in the run up to the financial crisis that erupted in August 2007, and associated negative externalities. As central banks play a crucial role in the liquidity provision to banks dur...

It has recently been argued that intra-eurosystem claims and liabilities in the form of TARGET2 balances would raise fundamental issues within the European monetary union. This article provides a framework for the economic analysis of TARGET2 balances and discusses the key arguments behind this recent debate. The analysis is conducted within a syst...

Containing short-term volatility of the overnight interest rate is normally considered the main objective of central bank standing facilities. This paper develops a simple stochastic model to show how the width of the central bank standing facilities corridor affects banks’ day-to-day liquidity management and the volatility of the overnight rate. I...

The banking system is modeled in a closed system of financial accounts, whereby the equilibrium volume of bank intermediation between households and corporates reflects structural parameters such as household preferences, comparative cost structures of heterogeneous banks, loan demand of corporates, and the difference between the borrowing rate and...

This chapter, forward-looking in content, addresses first the issue of which is the optimal scope of financial intermediation by the central bank. This is split into two components: first, whether the central bank should concentrate its attention on stabilizing an operational target in terms of a short-term rate of interest or should it have a wide...

This chapter provides an introduction to the theory of monetary policy implementation, i.e. how to control, in normal times, through central bank market operations a short-term interbank interest rate. A financial accounts representation is provided to clarify the impact of central bank financial transactions on the balance sheets of other economic...

What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short-term rates. However, auction allocations affect banks' subseque...

Financial crisis management (FCM) is a key function of central banks. After providing a critical overview of some key conclusions of the related literature, this paper revisits some of these conclusions from a central bank practitioner, and in particular central bank risk management perspective. It is argued that FCM will almost always imply except...

Domestic and foreign financial assets of all central banks and public wealth funds worldwide are estimated to have reached in 2007 more than USD 12 billion. Public investors, hence, are important players in global financial markets, and their investment decisions will both matter substantially for their (and hence for the governments') income and f...

Domestic and foreign financial assets of all central banks and public wealth funds world wide are estimated to have reached more than 12 trillion US dollars in 2007. How do these institutions manage such unprecedented growth in their financial assets and how have they responded to the ‘revolution’ of risk management techniques during the last fifte...

This chapter provides an overview of the risk management issues arising in central bank repurchase operations conducted to implement monetary policy. The topic will be further deepened in the next three chapters. In some sense, Chapters 7 to 10 are more focused on central banks than the rest of the book, since the risk management design of monetary...

This paper analyzes individual bidding data of the longer term refinancing operations (LTROs) of the European Central Bank. We investigate how banks' bidding behavior is related to a series of exogenous variables including collateral costs, interest rate expectations, market volatility and to individual bank characteristics like country of origin,...

Monetary policy implementation is one of the most significant areas of interaction between central banking and financial markets. Historically, how this interaction takes place has been viewed as having an important impact on the ultimate objective of monetary policy, for example price stability or stimulating economic growth. In this article, we s...

This report summarises the findings of the task force. It is organised as follows. Section 2 starts with a discussion of the relevance of credit risk for central banks. It is followed by a short introduction to credit risk models, parameters and systems in Section 3, focusing on models used by members of the task force. Section 4 presents the resul...

Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfill reserve requirements. We study bidder-level...

This paper reviews the role and effects of the collateral framework which central banks, and in particular the Eurosystem, use in conducting temporary monetary policy operations. First, the paper explains the design of such a framework from the perspective of risk mitigation, which is the purpose of collateralisation. The paper argues that, by mean...

Open market operations play a key role in allocating central bank funds to the banking system and thereby in steering short-term interest rates in line with the stance of monetary policy. Many central banks apply so-called 'fixed rate tender' auctions in their open market operations. This paper presents, on the basis of a survey of central bank exp...

This paper explores the role of central bank capital in ensuring that central banks focus on price stability in monetary policy decisions. The paper goes beyond the existing literature on this topic by developing a simple, but comprehensive, model of the relationship between a central bank's balance sheet structure and its inflation performance. Th...

Before 1914, there was little doubt that central bank policy meant first of all control of short term interest rates. This changed dramatically in the early 1920s with the birth of “reserve position doctrine” (RPD) in the US, according to which a central bank should, via open market operation, steer some reserve concept, which would impact via the...

This paper employs individual bidding data to analyze the empirical performance of the longer term refinancing operations (LTROs) of the European Central Bank (ECB). We investigate how banks’ bidding behavior is related to a series of exogenous variables such as collateral costs, interest rate expectations, market volatility and to individual bank...

This paper explains how excess reserves are relevant for today's central banks in the implementation of monetary policy, focusing on the specific case of the policy framework of the European Central Bank (ECB). In particular, this paper studies the impact that changes to the operational framework for monetary policy implementation have on the level...

Repo auctions are multiunit auctions regularly used by central banks to inject liquidity into the banking sector. Banks have a fundamental need to participate because they have to satisfy reserve requirements. Superficially, repo auctions resemble treasury auctions; the format and rules are similar and there is an active secondary market for the un...

The first of its kind, this book is entirely dedicated to the implementation of monetary policy. Monetary policy implementation has gone through tremendous changes over the last twenty years, which have witnessed the quiet end of 'reserve position doctrine' and the return of an explicit focus on short-term interest rates. Enthusiastically supported...

The paper explores the relation between individual banks' liquidity management in the euro area and the ECB's management of the aggregate current accounts held by banks with the Eurosystem. It is argued that, in the case of the euro area with its large, remunerated reserve requirements that have to be fulfilled only on average over a one-month peri...

We study bidder behavior and performance in 53 main refinancing operations ("repo auctions") of the European Central Bank (ECB). The data set starts with the first auction after the ECB changed from fixed rate tenders to variable rate tenders. We find that private information and the winner's curse are not important in these auctions. The minimum b...

Open market operations play a key role in allocating central bank funds to the banking system and thereby to steer short-term interest rates in line with the stance of monetary policy. This note presents some elements of a theory of bidding in central bank tenders in a framework such as the one of the Eurosystem. The ECB has so far used fixed rate...

The synthesis of a doubly labelled concanamycin derivative for binding studies with V- and P-type ATPases is described. The starting point was 21-deoxyconcanolide A (6), which was generated from concanamycin A (1) in three steps and which exhibited the full ATPase inhibitor activity, with the advantage of a stability better than that of 1. Through...

A simple model of the interaction between central bank liquidity management and the inter-bank overnight rate is suggested which helps understanding the effects of the publication of forecasts of liquidity factors by the European Central Bank adopted in June 2000. The paper argues that the main practical advantage of the publication of these foreca...

This paper analyses the "one country -- one vote" rule for monetary policy decision making of the Governing Council of the European Central Bank in a framework of cooperative game theory. The Shapley value is used as a solution concept. In contrast to former papers analysing the allocation of abstract "voting power" in comm ittees of international...

This paper analyses the “one country—one vote” rule for monetary policy decision making of the Governing Council of the European Central Bank in a framework of cooperative game theory. The Shapley value is used as a solution concept. In contrast to former papers analysing the allocation of abstract "voting power" in committees of international orga...

This paper describes the demand and supply factors affecting the amounts of deposits held by banks with the Eurosystem in the first 18 months of Stage Three of EMU and differences to the years before. The paper starts from the methodology adopted in a recent study by James Hamilton on "The supply and demand for Federal Reserve deposits". While the...

Understanding the factors determining overnight rates is crucial both for central bankers and private market participants, since, assuming the validity of the expectation theory of the term structure of interest rates, expectations with regard to this “monadic” maturity should determine longer term rates, which are deemed to be relevant for the tra...

Understanding the factors determining overnight rates is crucial both for central bankers and private market participants, since, assuming the validity of the expectation theory of the term structure of interest rates, expectations with regard to this "monadic" maturity should determine longer term rates, which are deemed to be relevant for the tra...

In the period from the 9th to the 12th century, Germany witnessed essential steps from a backward agrarian society towards a considerable degree of specialization and trade. The two main institutional innovations of this development were the rise of market places (until the 11th century) and then the rise of free towns (12th century). This paper re...

In this paper the transaction cost approach of Oliver E. Williamson is applied to the long-run evolution of the provision of physical assets to the organized securities markets of London and New York. Although this evolution is shown to be in general compliance with the predictions of the transaction cost approach, questions are raised by substanti...

I study a budget-constrained, private-valuation, sealed-bid sequential auction with two incompletely-informed, risk-neutral bidders in which the valuations and income may be non-monotonic functions of a bidder's type. Multiple equilibrium symmetric bidding functions may exist that differ in allocation, efficiency and revenue. The sequence of sale a...