Claims and liabilities related to monetary policy operations

In document ANNUAL REPORT ACTIVITIES AND FINANCIAL STATEMENTS 2020 BANCO DE PORTUGAL EUROSYSTEM. Lisboa, (Page 79-83)

1 Management Report 2 Financial Statements and Notes

1 Management Report

1.1 Balance Sheet

1.1.1 Claims and liabilities related to monetary policy operations

Throughout 2020, the Governing Council of the ECB approved a comprehensive package of monetary policy measures to mitigate the effects of the pandemic on the economy, which resulted, on the Banco de Portugal’s balance sheet, in a significant increase in monetary policy assets at the end of the year, with an impact on both monetary policy securities and liquidity-providing operations.

Against this background, monetary policy assets showed a net increase at the end of 2020 of

€30,410 million compared to 31 December 2019, reflecting a €15,571 million increase in the portfolio of securities held for monetary policy purposes, largely due to purchases of securities under the new Pandemic Emergency Purchase Programme (PEPP) and, to a lesser extent, of securities from the Asset Purchase Programme (APP), and a net increase of €14,838 million in targeted longer-term refinancing operations (TLTRO). Deposits of credit institutions with the Banco de Portugal showed, in turn, an increase of €12,400 million compared to 2019, as a result of the significant liquidity injection resulting from the monetary policy measures.

Chart II.1.4 • Aggregates of monetary policy operations | EUR millions

1,339 100 80 5 0

32,254

46,969

51,208 53,479

69,050 21,033

22,011 18,664 17,320

32,164

-5,498 -13,860 -14,091 -19,207

-31,609

2016 2017 2018 2019 2020

Deposits of credit institutions

Longer-term refinancing operations Securities held for monetary policy purposes (SMP, CBPP, CBPP2, CBPP3, PSPP and PEPP) Main refinancing operations

€15,571 million

Net purchases under non-standard monetary policy programmes

The portfolio of securities held for monetary policy purposes reflects the Banco de Portugal’s active participation in various programmes decided by the Governing Council of the ECB, in particular (i) the securities market programme (SMP) and the covered bond purchase programmes (CBPP and CBPP2), closed to new purchases, and (ii) the third covered bond purchase programme (CBPP3), the public sector purchase programme (PSPP), and the pandemic emergency purchase programme (PEPP), still open for purchases. Purchases of these securities are conducted by the national central banks (NCBs) and the ECB, under the principle of decentralised implementation of monetary policy in the Eurosystem.

As at 31 December 2020 securities held for monetary policy purposes totalled €69,050 million, about 36% of the Banco de Portugal’s total assets.

Banco de Portugal • Annual Report • Activities and Financial Statements 2020

In 2020, in terms of monetary policy securities, the decision with the greatest impact on the Banco de Portugal’s balance sheet was the introduction of the new pandemic emergency purchase programme (PEPP), approved on 18 March. Initially, this programme would reach

€750 billion, for the Eurosystem as a whole, and net purchases would run at least until the end of the year. Subsequently, on 4 June the Governing Council of the ECB decided to increase purchases to €1,350 billion, also extending the period of net purchases until at least the end of the first half of 2021, and also announcing that the reinvestment period would last until at least the end of 2022. On 10 December, this programme was further increased by €500 billion to a total of

€1,850 billion, and the horizon for net purchases was also extended by at least 9 months, i.e. until the end of March 2022, and the investment period was extended to at least the end of 2023.

As for the APP, along with a temporary additional envelope of €120 billion decided on 12 March and lasting until the end of the year, the monthly average pace of purchases of €20 billion, already existing in 2019, continued. The Governing Council expects net purchases to run for as long as necessary to reinforce the accommodative impact of key ECB interest rates, and to end shortly before it starts raising those rates. The Governing Council also intends to continue reinvesting for an extended period of time past the date when it starts raising the key ECB interest rates, and for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

In terms of the Banco de Portugal’s participation in the APP, the overall PSPP net amount grew by €2,530 million in 2020, reaching a total of €51,432 million broken down into supranational securities and Portuguese government debt, with the latter included in the non-shared-risk component at Eurosystem level. The increase in 2020 was driven solely by Portuguese government debt (a €3,781 million increase), since the supranational securities component decreased by

€1,251 million, compared to 2019. At the end of 2020 supranational and Portuguese government debt securities reached a relative weight of 25% and 75% of the PSPP respectively, compared to 29% and 71% in 2019.

The Banco de Portugal acquired PEPP securities with a balance sheet value of €14,227 million as at 31 December 2020, almost all of which Portuguese government debt securities.

The increase in securities held under these programmes led to a rise in risks vis-à-vis 2019, particularly in the component relating to Portuguese government debt securities, although there is also a rather significant amount of unrealised capital gains at the end of the year on these securities and a steady outlook for the evolution of the rating of the Portuguese Republic.

All the programmes implemented within Securities currently held for monetary policy purposes are accounted for at amortised cost less potential impairment losses, not reflecting gains or losses that may materialise. Losses are recognised only if securities are sold early.

Management Report Chart II.1.5 • Securities held for monetary policy purposes | EUR millions

3322,,225544

4466,,996699 5511,,220088 5533,,447799

6699,,005500

0 10,000 20,000 30,000 40,000 50,000 60,000

2016 2017 2018 2019 2020

Securities − CBPP portfolio

Securities − PSPP supranational portfolio supra Securities − PEPP portfolio

Securities − SMP portfolio Securities − PSPP − GOV portfolio

Total securities held for monetary policy purposes

€29,534 million

New TLTRO III and

€13,502 million

Maturing TLTRO II

In liquidity-providing operations, targeted longer-term refinancing operations (TLTRO III) grew quite considerably, in the amount of €29,534 million, to a total of €32,064 million. These operations started in 2019 and have a three-year maturity, with a possibility of early repayment after two years.

In line with the Governing Council’s initial decision, the final interest rate applicable to each TLTRO III operation can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. However, as part of the package of measures to mitigate the effects of the pandemic on the economy, on 30 April it was approved that from 24 June 2020 until 23 June 2021 the applicable interest rate might be 50 basis points lower than the average deposit facility rate in force in this period, but never below -1%. On 10 December, the Governing Council approved the extension of this period until June 2022, and also the completion of three additional operations to be conducted between June and December 2021. Given that the final rate will only be known at the end of each operation and that a reliable estimate is not possible, the deposit facility rate in force minus 50 basis points (up to a maximum of -1%) is used in a prudent and harmonised manner within the Eurosystem for calculating the accrued interest on these operations between June 2020 and June 2022, and so is the deposit facility rate for the remaining period.

Conversely, over the course of 2020 almost all TLTRO II operations existing at the end of 2019, in the amount of €13.502 million, matured, and only one operation of €9.5 million, remunerated at -0.4%, was active by the end of 2020, maturing in March 2021.

Banco de Portugal • Annual Report • Activities and Financial Statements 2020

Chart II.1.6 • Liquidity-providing operations | EUR millions

8592,812 79 29 1,279

Targeted longer-term refinancing operations – TLTRO I Targeted longer-term refinancing operations – TLTRO III Targeted longer-term refinancing operations – PELTRO Longer-term refinancing operations <= 1 year

Targeted longer-term refinancing operations – TLTRO II Main refinancing operations

Total lending to credit institutions

90

Also as regards monetary policy, Chart II.1.7 shows the daily evolution of the overall amounts of liquidity injected/absorbed by the Banco de Portugal in the Portuguese financial system. With the approval of the interest rate rebate as of June 2020, the amount of liquidity-providing operations went up significantly in the second half of the year. This, associated with the aforementioned significant increase in monetary policy securities, also led to substantial growth in deposits of credit institutions with the Banco de Portugal. These deposits follow the two-tier system for reserve remuneration approved by the Governing Council on 30 October 2019. This system is based on the introduction of a two-tier system for reserve remuneration, which exempts the part in excess of the minimum reserve requirements from negative remuneration at the rate applicable on the deposit facility. The exempt tier is currently remunerated at an annual rate of 0%. The volume of reserve holdings in excess covered by this scheme is determined as a multiple of 6, depending on each institution’s minimum reserve requirements. The non-exempt tier of excess liquidity holdings continues to be remunerated at 0% or the deposit facility rate, whichever is lower.

Chart II.1.7 • Daily balances in liquidity-providing and liquidity-absorbing operations

| EUR millions

Management Report

1.1.2 Gold and foreign reserves and euro assets

In document ANNUAL REPORT ACTIVITIES AND FINANCIAL STATEMENTS 2020 BANCO DE PORTUGAL EUROSYSTEM. Lisboa, (Page 79-83)