 Good afternoon everybody and welcome to the Market Participants panel. So I'm Imen Raminirousseau. I'm the Director General for Market Operations at the ECB. And in this Market Participants panel, the idea is to get market insights on the topics that have been covered in the other sessions from the academic point of view. So we will organize that in a dialogue with my panelists that would be as interactive as possible and keep you entertained for about an hour. So I'm very fortunate today to be joined by a very distinguished set of panelists to help me, you know, desecrate the implications of the very unusual cycle of monetary policy normalization across the globe on money markets. And I will introduce them in turn starting with Fabio Natalucci. Fabio is the Deputy Director of the Monetary and Capital Markets Department, MCM at the IMF. He's responsible for the very well-known global financial stability report of the IMF. And in today's panel we will benefit from Fabio's excellent knowledge of central bank policies both in the U.S. and across the globe. Camille de Coursel. Camille is the Head of Strategy for G10 Rates at BNP Paribas. She is an expert watcher of central bank decisions and their repercussions for money markets. She will enlighten this panel with her excellent understanding of research and policy choices. Eric Scotto di Rinaldi. Eric is Head of Liquidity Management at Rabobank and a member of the ECB Money Market Contact Group. In today's panel, Eric will bring the sell-side perspective and how banks adapt to the new environment of higher rates. And finally, Mikael Paco. Mikael is Head of Euro Sovereign and Money Markets at AXA Investment Managers. The investment management arm of AXA, managing almost a trillion of assets. Mikael will bring perspectives from the buy-side and represent the non-bank community in our discussion with a particular position in money markets. So we'll start with the topic of the day which is basically central bank normalization and how this impact excess liquidity in the system and money markets more generally. So all major central banks today are fighting an exceptionally high level of inflation and a very uncertain inflation outlook with an accelerated pace of rate hikes and they are also engaged in the reduction of the size of their balance sheets. So question for the panelists, what are the implications of the different speed and modalities of normalization across central banks? And how does this impact money markets? In particular, if we look across the globe and turning to central banks that are already well advanced in their cycle, is there any particular reason, lesson to draw from the Fed and from other central banks that have started their normalization cycle earlier than the Euro area? And maybe I'll start with Fabio for his perspectives. Fabio. Thank you. Thank you first of all for the invitation. It's a pleasure to be here. I think the Fed can be a useful comparison for two reasons. One is because they already hiked the policy rate quite a bit. So as you have seen yesterday, another 75 basis points. Now we are 4% and share power may clear that it's way to go still. But also because they were the only previous central bank that actually did try to normalize policy back in 1719. So what they do, the size of the balance sheet the Fed now is about 8.7 trillion. On the SOMA portfolio, they have about 5.6 trillion of treasuries and then there's another 2.7 of MBS. And then on the liability side, there's about 3.1 billion of bank reserves, about 2.5 trillion of overnight RRP and then there's about 650 billion of the treasury general account. So the system works in autopilot essentially as a cap system. Once we hit the cap, they only going to invest above the cap. So far QTS progressed quite smoothly. Monthly declines were smaller than the beginning related to the cap, but now I think that we are exactly where they designed it to be. Just to give you a sense, treasury have declined about 160 billion so far since the QTS started and about 30 billion of MBS. The composition of the liability is always interesting in the sense that the SOMA portfolio declined not too much, but we have seen a significant increase in overnight RRP. And so overnight RRP it's about now, as I said, 2.5 trillion and reserve 3.1. So the composition side, I think it's something that's important to look at because if you look at where reserves are today compared to where they were in 19, you could think that there is a long way to go before you reach some potential equilibrium. But they are in fact, it depends how the composition side is going to play out in terms of an RRP versus reserves. And QTS expected to pick up in 2023 with about 600 billion of contraction on the treasury portfolio and about 304 billion of the MBS. Now why there has been this increase overnight RRP is because money market fund participation has increased very quickly. Because money funds rates and yield are much closer to market rates so they have followed the federal fund rate much quicker than what we have seen instead in the bank deposit rate. So there's been a huge influence into money market funds, particularly prime, the decline has been a decline of the maturity of what they hold and in part because there are not many alternatives out there. So net debilitation is negative. And so without that, and with repo rates quite low, in some sense overnight RRP becomes the best option that you have on there in terms of investment. Bank deposits have become about 200 billion, but as I said, the increase in the deposit rate has been quite slow. That's what money market funds are so attractive. One point that maybe you can come back later, but the federal reserve now it's also accruing net negative income. Which means that in terms of what they pay on the liability side versus what they receive on the asset side, income is now negative. And there are some projections that could actually arise. The way this is done from an accounting standpoint, they book what it's called the fair asset effectively. So you defer positive income to the future. That has resulted in pressure on money market funds. So we have seen, for example, unsecured spread rising higher the year end, so FRIOIS or labor OIS, those unsecured spread have widened. But at the same time, we have seen funding pressure. If you look at cross-currency basis swap market, we have seen a significant widening in the euro-dollar basis, in the yen basis and the Swiss franc basis. This could be technical in part as we go to a year end and come off as we cross the year end. But it's been quite notable and more visible than I think the last quarter or year end. And then one last point, they have a floor system. So we have seen the federal fund rate has been within the band well behaved. But we have seen some leaks in the floor if you want, right? The floor is between the interest rate on reserve and over an IRRT. We have seen some particularly bilateral repo rates that actually dropped below the floor, although as some of this specialness goes away, I think repo rates are starting to move higher. One last thing is the other possible comparison. Maybe it's the Bank of England. They started QT this week. They scheduled to have 8 auctions of 750 million guilds. The sales are concentrated on the front end. I think trying to avoid additional pressure on the long end that we have seen in the past weeks with the pension and LDIs. They have one sale so far of 750 million. The bid to cover was 3.3. So there was a lot of demand for front-end guilds. And I think this is a point that perhaps we covered in the discussion that there seems to be a lot of scarce collateral. So demand demand for scarce collateral. One measure of this, if you look at Ronia versus Bankrate, that number is about minus 40 basis points. Or if you look at swap spread at the two-year tenor, swap spread to cash guild is about 125 basis points. So that seems to be a sign of collateral scarcity there. And the concern, of course, is that transmission of monetary policy would be impaired. Yeah, no, no, absolutely. That's a very good start. So Camille, how do you see the broader implications for the various segments in the money markets of normalization? To the ECB, as we all know, you know, the ECB has prioritized unwinding the TLT arrows. And the TLT arrows have played a major role in exerting significant downward pressure on funding rates for the economy, for banks, which had been quite visible with very low arrival rates, especially when you look at those relative to esters. So we had a very strong compression of esterable basis during 2020 and 2021. Because basically the very cheap TLT arrows funding have cannibalized banks' reliance to market funding. So we had CP issuance, dropped record lows, the balance of power shifting from banks' customers to banks' hands. Because basically banks were already full of cash, did not really need much more cash, and therefore they would accept term deposits at lower rates. Now, what we are going to see as TLT arrows are getting repaid is an unwind of this trend. So we will see gradually banks return to the market. Banks will also need to raise NSFR funding again, especially as the maturity of TLT arrows quickly fall below six months. So they will rely more again on term funding, and therefore this should contribute to higher URIBOR rates relative to ester, which is not at all what we are seeing right now. We have seen a bit of rewidening during the year, but at the moment there are also other considerations and some technical factors which make that URIBOR versus ester is very low. But we would expect a normalization of that basis as the TLT arrows are getting repaid. And then when it comes to ester, ester is a function of excess liquidity. Typically we still see it as a convex function. So as liquidity declines with the repayments of the TLT arrows, we would gradually expect a rise in ester, but it's likely to be quite marginal in a sense that even for two trillion of repayments of the TLT arrows, when everything will have material, when everything will have been repaid, we would expect perhaps something like three BIPs higher or three BIPs of tightening between ester and the DIPO facility rates, but perhaps not more whereas for ester, more basis, at least from current levels, we would expect at the very least a 10 BIPs widening impact. So I would say with the sequencing of the ECB, which is let's tackle the TLT arrow first, I think the impact is going to be more visible on unsecured funding first. No, absolutely. And I think that's a very good perspective on the monomarket curve. But now when we go into pass through two different segments, I mean, we see that the transmission of higher rates in the EUR area has been uneven. I mean, it's been very smooth in the unsecured segment. Also this morning, we looked at EURSTR after the start of the maintenance period yesterday. It's a perfect pass through of 75 basis points. But somehow in September, we had a more bumpy ride on repo markets. And so the question is taking also Fabio's point about this scarcity, this collateral scarcity issues that we see, not only in the EUR area, but also in other jurisdictions, the UK, the US and others. I mean, how do you expect the pass through to evolve looking forward both from the sell side and from the buy side perspective? Because I think both of these are important. And so how the banks on the sell side pass the higher central bank rates to their wholesale depositors, okay, and also to repose from non banks and what are the main drivers? And maybe I can turn, of course, to Eric to answer that first. And then I'll turn to Miguel for the buy side. Eric. Yes, thank you very much indeed. And thank you for the invitation. So very quickly from the buy side, you said it right. When it comes to the unsecured rate, at least I can speak for our institution, the transmission of the monetary policy stance is integral, fully reflected in the levels that we show to the sales on screen. I will, I would like to add as well vis-à-vis the comments that Camille made on the Esther DFR basis, that indeed I agree with her analysis that as the normalization continues, we should see a little bit of tightening of that. If you do a regression, you do not get very far from let's say four, three basis points. But I would like to add as well that the Esther is very driven not only by how much liquidity there is in the system, but how the liquidity is distributed in the system. Because if you look at the way the Esther contribution is made, it's the financial institutions and banks currently do not trade very much between themselves. Most of the volumes of Esther are driven by non-bank FI deposits and these deposits are there for residual liquidity management purposes and Michael will probably be able to add more color to this. But all in all, I would say yes, it's about the removal of the liquidity, but how does that liquidity eventually get spread out will also play a role in the tightening or widening. I do see a little bit of a risk of widening, especially as we get closer to the reporting date on that basis, simply because there is, and we will discuss later on about the regulatory impact, there is a low regulatory value assigned to the overnight deposits from non-bank FIs. On the repo rate, I cannot really comment because I do not have that under my remit. I'm head of liquidity management Utrecht. However, having quickly discussed with the repo desk, the expectation is very much that as gradually the teltro gets unworn, but also quantitative tightening comes into play, there will be more of the securities that are in demand released into the market and hopefully that should help, but that's as far as I would go. And Michael from the buy side perspective, how do you see it? Different factors to look at when we are talking about the rate pass-through. One is your link to the type of instrument we are talking about. It's true that when you are looking at secured or insecure instruments, it's different. When it's funded investment, it's different from derivatives. We also have to look at the fact that these instruments or some instruments can be eligible to the ECB QE or to the TLTRO operations, and as such are subject to scarcity or not, depending on their eligibility. If we take the example of a ester or urebor swaps, for example, we've got a pretty good transmission from the ECB rate acts that happened over the last few months. It's less true when we look at core government bonds, when we look at boons, shats, we can see that they are pretty expensive and it's well materialized when we look at the swap thread where the significant winding versus swaps, so it shows that there is some richness in these papers. When we look at commercial papers and short-term credit, repricing has been pretty massive, so we haven't seen any major lag versus the pass of policy rates, so on that front it worked pretty well. Another factor to look at and that is impacting transmission to money markets is regulatory mismatch. On that front, we know that banks have several ratios to respect. These ratios have been put in place to strengthen their financial profile. We can list the NSFR, the LCR ratio, the leverage ratio, or the SRF contribution that will take place at your end. These ratios pay attention to them at your end or at your quarter end. It implies that these banks or banks that need to respect this ratio take less cash during the quarter end and your end and it has some impact for other market actors. We can talk about insurance companies, pension funds, and money markets. If we take the example of money market funds, for example, they are facing some regulatory constraints as well. They need to hold a significant amount of cash, 7.5% on a daily basis, 15% on a weekly basis. Most of the time we run this fund with more than 15% of daily cash and the question is where we can park this cash. One solution is to leave this cash at the custody account, maximum 10% by regulation. Then we have to look at reverse repo. It's eligible for the daily ratio with a 24-hour call. We can look at treasury bills. They are not eligible to the daily ratio but to the weekly ratio. We can do some overnight deposits with banks and the problem we face is at quarter end and your end when banks don't want to take more cash on their balance sheet. Eric said a few words about it but we know that this cash is kind of an odd potato. I would say nobody wants to take it and then it can explain the stress we see every quarter end, every year end since 2015 now. We have the same stress in the US. The difference is that in the US there is a reverse repo facility and money market funds use this facility extensively and Fabio told us that they deposited like 2.1 trillion at the end of September. We can imagine that they will do so at Tyrande as well. It was a record breaking month. Very big amount of cash, close to 50% of the IUM of money market funds in the US was left at the facility. It shows that at least there is an alternative for money market funds in the US to park cash when banks don't want to take it. It's different in Europe. We can't do so. We have to find another solution and that's what we've seen since mid-August, tightening or reaching of t-bills, widening of the cross-currency, euro-dollar cross-currency basis. We've seen also a tightening of Japanese t-bills, a few basis points. European funds or money market funds try to park their cash somewhere to avoid massive fees paid to custodians or to banks. At the end, it's a closed system. You are left with plenty of cash in the euro system and someone has to take the loss or pay the price. It's true via all the instruments in money markets. Maybe on that song, would you say that this year you are more worried for your end than you were last year? I'm not very optimistic, I would say. When we look at the pricing in the market currently on reverse repo, it's like 500 basis points cost for the turn of the year. When we look at t-bills, they have a premium. It went up to more than 100 basis points on the three-month, six-month maturities. It's back to 30, 40 basis points currently, but I would say even if TLTROs are repaid for 1 trillion, I'm not sure it will bring enough collateral in the system to chippen the repo. Banks for sure will have the SIFAR contribution, so it won't take any more cash. The only question is, have banks done most of the job already, meaning that they have reduced their balance sheet, reduced the cash, tried to ask institutional clients to shift to money market funds or to go elsewhere in the market? If it is the case, maybe it won't worsen, but I don't know on that point. If I may add one quickly, just because of the bank levy, if we look at one basis point that we are to pay as an institution, it's annualized, which means that over a three-day turn, each basis point that you have to pay in levy is 1.2%. That you would charge, you know, prorated to the number of days. So you can quickly see that if, I think, Michael, when last time we discussed you mentioned that on your current accounts, sometimes you'll charge 5%, 6%, then when you have that rule of thumb, that's quickly understandable, right? If you have a few basis points, and it's also dependent on the location in Europe, you may have different levies that apply, you can see that banks do have to face enormous costs at year end. And there isn't, as we mentioned, always a regulatory benefit of setting. So you have to manage the deployment of your balance sheet. And one of the key things that we see is that the balance sheet is a finite and costly resource. Absolutely. And we'll come back to that. So now maybe if we stay in this sequence of normalization of central banks, but we look a little bit further, at some point, now we have plenty of reserves in the system, plenty of excess liquidity. But at some point, the question of demand for reserves will arise again, meaning that we will reach a point where reserves become scarce again and the Fed had faced that back in 2019, actually. And this had nearly derailed their normalization of the balance sheet at that point in time. So, I mean, when you look at this question of the demand for reserves, and you see that a lot has changed since the great financial crisis in terms of regulation, as you were just mentioning, with all these new ratios, levies and stuff, how do you see banks being able to cope with lower amounts of liquidity, lower amounts of reserves in the system in this normalization cycle, given the shift in their funding structure and the fact that there are more deposits. And what does this imply for the minimum amount of liquidity needed to anchor short-term rates? So, this kind of optimal level for reserves. So, maybe I can turn to you, Camille, to see in your research and so on. What can you tell us about this kind of sweet spot in terms of demand for reserves today in the Euraria? Yeah, I have to say it's very hard to tell. What we know is that Ionia and now Ester have been very well anchored to the DFR when excess liquidity is greater than at least 700 billion, and that beyond that level, basically you have limited volatility around Ionia or again Ester. But that was indeed before, as you pointed out, and as Michael and the others have mentioned, indeed, lots of regulations have been put in place since. So, this threshold is likely to be higher now by how much is it higher, is quite uncertain. Is it 500 billion more, so 1.2 trillion or even more? On our side, we have not done yet the full analysis because in any case, we feel like we are still a very long way from reaching that sweet spot, as you call it. And therefore, in our projections, for example, it's very unlikely that we even go back below 2 trillion of excess liquidity over the next five years. So, at 1.7 to 1.9 trillion of excess liquidity, we would tend to feel that the DFR will still be the anchor, even though we will have had by then indeed clearly a dramatic drop in excess liquidity. And therefore, once again, as we discussed before, it could push Ester a bit higher. But what's important here is that the DFR is still likely to be the anchor and therefore, for us, it's going to take a very, very long time before we go back to these sort of levels. Who else would like to come in on this question of reserves? If I may, yes. So, when I was at one session of the money market contact group, I did try to explore a little bit this question and just as Camille pointed out, it's a very difficult one to answer and indeed, just when you do some really, really basic checks, you think that perhaps indeed the sweet spot could be at least what you don't, what you cannot tell is what happens if you tighten really very much under 1.8, 1.7 trillion. That's exactly what Camille said as well. One of the things that I found out, at least intuitively anyway, for me, the regulations have been the main drivers to the excess liquidity that we see and the requirement for the buffers, the LCR, that's the existing regulation. You look at intraday, there is already some regulation, like you look at the Bank of England pilot 2, the Swiss as well. So there will be pressure also vis-à-vis intraday, even though a lot of institutions will have access to their intraday credit limit, but they will probably prefer to have cash as reserved, no valuation element. So just the buffer requirements themselves will be a big contributor or one of the main drivers to the threshold and defining the sweet spot. Another one will be the uncertainty on the mix that you have in that buffer. So how much cash will institutions hold relative to securities and what securities will be available? There will be a function also of the ability to value the securities. There will be some risk management preferences. Probably you will have some risk management functions that will say that they only want a certain category of bonds rather than all of the bonds. So the lack of homogeneity here will play a role. And there will be also the opportunity, the cost versus benefits, given we are in a positive rate world. And I did mention the risk management. That's one of the other big factors overall. Since the global financial crisis, I do get the impression that risk aversion has increased. We'll talk more about regulation. There is a paper that I really like on the sweet spot. You mentioned the scarcity of reserves. It's a paper from the Fed New York. It's the monetary policy implementation with an ample supply of reserves. And in that paper, one of the key things that they argue is that eventually the central bank will have to aim for a trade-off, trade-off between financial stability, frequency of intervention, size of intervention. And is likely to target a level of excess reserves in which the demand curve is gently upward-sloping, namely that the sensitivity, if you will, is not as enormous, not as big. So there is still a control. While at the same time, there is pass-through. You're not entirely in a world as we've known where only the deposit-facility rate matters. It will be the anchor, but you will be able to see some movement. So I really like this paper. One comment about when Esther will trade above the deposit rate. It's linked to the absolute level of excess liquidity, but it's also linked to how this liquidity is spread between countries and banks and very linked to fragmentation. So we've seen in the past that this liquidity was maybe not spread in all banks or not all countries, and that we had some issues there. So on that front, maybe a target to figures can give some indication of where this liquidity is currently parked. So pretty difficult to say, as Camille said, what is the amount that will make a shift to the Esther fixing. Yeah, but it seems that market sees this as pretty far away in time and that the DFR so far remains the anchor. I mean, by the way, we have recently, I'm sure you've seen in the package of monetary policy decisions of last week, there was also a change in the remuneration of minimum reserves from the MRO rate to the DFR. And this is also in recognition that the DFR is currently the market rate and basically aligning the remuneration of minimum reserves to the market rates in order to make it neutral. So maybe on this note, we can then transition to the second topic we have to put today, which is more on the market structure of money markets. And that will touch upon the scarcity of collateral that we already mentioned. And then extending to market liquidity and the fragile market liquidity we are experiencing since basically regulatory reform has been implemented. So starting with collateral scarcity and a lot has been discussed recently on that, we wanted to go into the structural drivers for demand of collateral in money markets. So how do money markets square this kind of imbalance between the large amount of excess liquidity and the scarce collateral that we have today, especially in terms of safe assets? And if we look forward, can we be satisfied that with normalization of both the balance sheet of central banks and excess liquidity, the collateral will be returned to the market or are there elements that tell you that scarcity might persist even after balance sheet normalization has started because there are other effects at play. So for example, higher rates would translate and higher rates but also volatility would translate into valuation effects would translate into margin calls and all of this fuels the demand for collateral at the same time. So what's your view on that and maybe I'll turn to Camille to start but please feel free all of you to give a view on that Camille. Yes indeed, there are various drivers of the demand for collateral. As you said, I think firstly the short positioning in the market is obviously one of the drivers. So as we have seen this year, customers will borrow securities to sell them if they expect rates to rise. So that dimension is particularly important in a hiking cycle. The other one is also foreign central banks managing their foreign reserves so they will buy short term assets or borrow through the repo market that will also have an impact and as you have said clearly initial margin calls very important indeed. So CCP's request high grade collateral not cash, mostly even require core bonds same with unclear derivatives position where bonds tend to be the trend to be the norm more than cash. So now looking to next year for example you could argue that perhaps the first factor so short positioning could ease because maybe we will finally reach the terminal rates on the ECB and therefore there will perhaps be less positioning for a further rising rates and therefore maybe less demand of collateral from that perspective but for example when it comes to the demand for collateral with CCP I think it is probably going to stay and the second factor so foreign central bank reserves I think it's quite an important one. It can very well continue to weigh in the first half of 2023 especially if we end globe also government as we know the remuneration of government deposit has changed but it is only until the end of April 2023. So at the moment you still have 580 billions of government deposits in the Eurozone on top of that you have about 500 billions of non-government deposits and or of foreign deposits and the risk is that as you go into next year these are gradually rebalanced in the market for perhaps better return and if that were to be the case then you will have another stronger appetite for collateral and less demand for cash. So I think in total it's looking like it's not completely certain so it's true that on the TLTRO side as these are going to be repaid we will have some collateral coming back to the market but what we know is that you don't have more than 200 billions of government bonds that have been placed at the ECB as collateral for the TLTRO so it's not like big compared to the whole TLTRO size and then if you think in terms of QT you could argue that QT will help given that when the ECB starts we will have less reinvestments but I think what we need to bear in mind is that when it comes to QT in the Eurozone it's mostly a question for the IPP so we will see a passive roll-off of the IPP programme and therefore in terms of size we are talking on average about 28 billion per month as a maximum across all assets across all jurisdictions so you know when we think in terms of German collateral which has been particularly squeezed this year and it has been particularly squeezed because the free-float in Germany has dropped to extremely low levels we think it's probably around 10% QE has been one of the reasons why it is so low but clearly not the only one so going back to QT, 28 billion across asset, across jurisdictions it might not be a game changer for German asset swap or German repo rates I think I think supply will be a more important driver as we start the new year but on balance QT might not be having so much of an impact and I think that going back to the US and UK experience what is quite telling there is that in the UK where they have completely dropped their reinvestment at the beginning of the year and where they even have started active sales if you look at asset swap they are still very expensive the only place where asset swap and repo rates are much more normal is actually in the US and in the US as we have discussed previously there is a repo facility which is very different in nature from the current PEP and APP facilities that we have in place in the Eurozone it's different in terms of well the PEP and APP facility is a backstop facility there is no fixed cost for it the reverse repo facility in the US there is a fixed cost it's within the corridor it's open to non-banks and therefore the Fed is intermediating the market and one of the reasons as well why you have a squeeze of collateral even though you have different channels lending securities is that when it comes to the Eurozone or other regions as well lending in the repo market has a cost it's intensive in terms of balance sheet so it's interesting that in the US where the Fed is intermediating securities at a fixed rate within the corridor that the place where asset swap are looking much more normal exactly except that you know one of the kind of goals of normalization is also to say well market intermediation somehow should come back and should gradually replace central bank intermediation but somehow you're telling us that we're just having central bank intermediation in the US by another name it seems but opening it up to others as well maybe more optimistic views think about the standing repo facility just to maybe calm down the enthusiasm a little bit it's not so much the size but there is an issue there in terms of counter parties it's still open only to the primary dealer and the banks essentially so it's not open to the entire market so the floor of your hierarchy is open to money market funds so beyond the banking sector but the standing repo facility you have to be a primary dealer so it still requires intermediation of banks balance sheet if you want should there be pressure in the repo market so it's untested in some sense it wasn't there in September 19th so it's clearly it's a step in the very good step in that direction but whether banks in times of stress will be willing to intermediate for their clients and put their balance sheet at use that's something that needs to be seen obviously but we haven't said yet so maybe we can broaden even more the market structure discussion and go into you know market liquidity because it's been said many times that one of the characteristics of the post great financial crisis environment is it's more fragile market liquidity with bottlenecks in the intermediation capacity of dealers and the conversation on that is very live at the moment for example on the US treasury market where these fragilities have been basically identified and there even a kind of interagency effort in order to address them however it's taking quite some time so I mean do you think that these fragilities that are present probably in some form in a number of bond markets and also money markets have negative repercussions on the capacity of central banks to normalize their policies and how do you assess the role that regulatory changes have had on market liquidity in the past decade and do you see there a difference between the US and the Euro area and let me start by Eric and that and then turn to Mikael and Fabio Thank you very much Imani, indeed this is a question that is very dear to me as well when you do market making you need to have inventory you need to be able to warehouse risk, internalize risk and one of the key regulatory changes that we've seen over the past decade has been the interdiction or the banning of proprietary trading and the question for me is whether this regulation has potentially not left a gap in the market structure so that's really because I do not necessarily see the replacement the ability that some financial institutions had to intermediate without going into an externalization of the risk this internalization of risk for me is key it provides a lot of liquidity regardless of the market so that's one key element perhaps a secondary element which is linked also to this regulation is there an unintended consequence vis-à-vis uniformization of behaviors because if you start to remove as this regulation did the appetite for risk in some institutions do you make them more like the others and therefore do you end up having more uniform landscape with more uniform behaviors and therefore group exit, you know group rush towards the exit so that's for me the question then becomes has there been because of this or indirectly or potentially the creation of an underlying systemic risk so that would be another one then perhaps going back to one of the points we discussed and the difference in regulations between market actors if you look at the fact that for banks short dated NBFI so when I say short dated overnight NBFI deposits have no LCR value actually there even a cost no SFR value, leverage ratio is impacted because you grow your balance sheet, these kind of things but at the same time as Michael was saying they are forced to be liquid and therefore hold a certain amount of their assets under management into very short dated deposits so there is a little bit of a contradiction and it's not necessarily helping but it's very difficult to tackle at the same time another one, if you look at the leverage ratio the cost on the balance sheet pretty much is it perhaps one of its unintended consequences that when combined with the general risk aversion that has been growing past the global financial crisis the interbank intermediation has all but disappeared if you look at the Euro-Ibo statistics you can see that besides the one week level one contribution is minimal under 20% and the further out you go it goes even lower so overall for me the feeling I have is that even though the regulations are necessary and they've made the balance sheets of the financial sector and banks in general a lot more robust, for me the question is have they perhaps made them also less flexible more costly and therefore more difficult to manage and deploy Absolutely, so I'd like to leave a little bit for questions so maybe I turn to Mikael if you bear with me I'll turn to Fabio first and then we'll open up for questions and I'm sure you'll be able to also chip in for questions, Fabio and you have the last word in two minutes and then we open up for questions I'll be very fast, maybe I'll pick up from the last point that Eric made I think we are in a different world we are in a world of high inflation, high rates, high vol and the abrupt change from the two years ago when we are in low rates, low vol, low inflation that implies that liquidity needs to be priced differently I think that's the cyclical component of this people need to realise that liquidity is not free anymore it's liquidity will have a price that has to be a liquidity premium that people are willing to create and I think that's an important factor that needs to be kept in mind, there are then some structural issues regulation, market structure, high frequency trading but the point that liquidity is not as it used to be and needs to be priced, I think it's something that needs to be considered otherwise there really is going to be much more issue in terms of liquidity, I think what we have seen in the UK for me it's a warning shot, it was related to very idiosyncratic UK issues, but it did create all these waves under the surface that popped up in different markets like credit markets in the US, emerging markets even as the back security is in place as far as Australia so the big question in markets now is what would the Fed do what if this happened in the US, there are tools with the standing river facilities one, they could do QE obviously that would create some communication challenges if you do QT and QE at the same time as we see in the UK, there's a discussion at US Treasury whether you should do central clearing, whether the SLR should upside curve out for market making for example or even Treasury buy back so they're buying back the after-run so there is more on the run in the market it's all going to be what is the optimal level of reserve and how they get close and how quickly they get there I think in the US, but the starting point is that both for structural reason and cyclical reason people need to realise their liquidity as a price now and need to be pricing it I fully agree and also the fact that somehow seeing the return of market volatility is a bit heavy after years of very low volatility and means that good risk management by financial institutions is going to make a real difference on that note, maybe I open up the floor to the audience for questions to our panellists and we have both online and also in the room so maybe I can check with those in the room because I don't see you whether there's any question already from the audience there okay so I think I get the message that there's no questions in the room so any questions also in the virtual chat here so I'm looking I need to join a meeting with the managing director if you don't mind I will disconnect sure absolutely thanks again for it okay so I have one, thanks very much Fabio thank you very much so I have one question online and this is from Sphia who asks what are the hurdles for the ECB to implement the reverse repo facility yeah that's obviously a question that I can maybe just say few words on but I won't be long because I think it's all about I mean as Fabio has explained if you want to implement such a facility you need to think about the design carefully about the design of this facility both in terms of scope of access types of financial institutions that would have access to this facility and comes with this as well a number of operational considerations to take into account in terms of you know this is a facility that would take cash from financial institutions and give back a basket of collateral so you need to be able also operationally to handle that from a very high number of financial institutions and being able to provide you know GC type collateral which in the operational setup that we have in the Euro area with a decentralized implementation of monetary policy and also therefore an decentralized posting of collateral by financial institutions and same thing about the asset purchases that are implemented on a decentralized basis it's something that requires careful consideration and is more difficult to implement than I would say in the case of a single jurisdiction like the Fed but my understanding is that even at the Fed basically designing this facility back in 2013-14 required quite a lot of work and it's still being adjusted regularly so long story short it's one of those monetary policy measures that requires a careful consideration of both the objective the operational considerations potentially also legal considerations regarding the ability of financial institutions to access the facility in compliance with their own regulatory setup let me check if we have further questions here okay so now there's a question in the room okay so I'm switching between different chats you know bear with me go on for the question in the room hello can you hear me yeah absolutely I was wondering because there were discussions on ECB bills or some very small whispers going around do you think this would do anything when it comes to intermediation when it comes to ECB bills if you issue those and do you think this is something which would be feasible also to ease just a strain we have seen generally thank you I'm not going to be answering all the questions so maybe I can have turned it over also to a panelist to basically address this question on bills would it help with the question of scarcity and the market structure issues we have discussed maybe I can start on this one that's something we are contemplating or we are thinking about likes very versatile facility as we know that there are some regulatory constraints that will take time to be adjusted or maybe won't be adjusted at all that's a way to go around it and maybe bring some fluidity in the market because anyway it's very intimidated by banks banks don't want to take our cash so another way to do it is going directly to the ECB via the reverse repo facility or going to the ECB via bills and then it's a question of remuneration is it competitive versus existing issues we see at quarter-end and year-end more specifically we lost the sound for a moment Mikael and I think I wasn't the only one but if you can repeat very quickly what you said, I think we lost you when you were saying that you also have to look at the price of the bills it will depend on the price of the bill versus existing instruments like overnight deposit reverse repo or T-bills if it brings the floor to the market but it doesn't put aside other market instruments then it will work pretty well but it's good to have a floor anyway currently in the market with some investors that don't have access to the ECB and have no floor with the deposit rate and the banking system in a way and some specific clients that have access to the ECB or have a floor with banks so I would say if it can fix it and avoid the regulatory discrepancies then it would be good and I see a point about the floor that's an important point because when you compare it with the Fed because there's no bill issuance for the Fed there's actually a soft floor the overnight RRP is a soft floor and you still have a number of money market rates that are trading below and the bills in particular the SNB by contrast has both and I think this is an interesting experience to look at and actually the pricing of the SNB you have to look at the different maturities the pricing of SNB bills and an equivalent overnight reverse repo is not exactly the same so there's something to dig out also from this experience so let me I have still a number of questions on ECB debt certificates let me turn to the other panelist to see if you would like to add something maybe Eric or Camille so we discussed so I can't really comment on the discussion that took place in the money market contact group but just speaking for myself indeed the question of the ECB issuing bills is something that I was wondering at the time exactly along the same lines as Michaela because eventually where do the non-bank FIs where can they park the excess euros that they have especially on difficult dates where banks are constrained as we already discussed in the panel vis-à-vis the deployment of their balance sheet and then it shouldn't be I believe it is part of the instruments allowed under the ECB rules so it would be I think it would be an instrument to think about I really like the idea and maybe it would be simpler to implement than reverse repo facility that's also one of the questions suggesting that on the chat from Christophe Rieger Camille anything to add on this topic we hear you yeah go ahead okay because I have completely lost connection for a while but so I've just heard the last 30 seconds I mean on our side I think I completely understand indeed the complexity of having a reverse repo facility in the eurozone it's very different it's a euro system so it's very it's more complex than in the US for sure there is also for example a question of cost how do you fix the rate for different bonds the ECB only holds 10% of the portfolio so how do you factor that into accounts can each NCBs have their can we centralize a reverse repo facility across NCBs and ECB or not because otherwise we are back to just 10% of the entire portfolio which is not very large so it's true that we have also thought on our side about bills it certainly has a lot of merit and in particular again as I was saying earlier in the first half of 2023 if the remuneration of these deposits is going back to be 0% for us there is definitely a risk that we could see the sort of market impact that we had seen during the summer where we had a completely negative correlation between the market pricing so esterswap and bills and short term bonds of certain countries which was suggesting at the time that there was really an issue with the transmission of monetary policy so in the first half of 2023 given that there is 1 trillion at stake maybe it will be much less by then but for us it's true that perhaps bills could be in the near term would help alleviate any tensions that we could have at the time if a large portion of that cash is rebalanced to the market we can't hear you Imen that should be a bit better I was just saying that indeed thanks for these thoughts because I think that the purpose of the collateral scarcity discussion was also the structural elements of it and so you set it up in the right context I would say so thanks very much I mean I think a number of other questions not coming up on the chat and don't worry your questions are not lost we heard them and I certainly read them but we won't be able to address them today because the panel is coming to an end and very sorry for that but as usual we try to stick to the time so let me invite you actually to reconnect tomorrow so we're going to close the conference for today and we're going to invite everybody to connect again tomorrow at 9.15 for the conference continuation and a lot of interesting topics again including looking again at bank intermediation at safe assets and also the digital aspects of it so stay tuned stay with the conference and see you all tomorrow thank you very much to all my panelists for the great discussion we just had and I wish everybody a very nice evening as well bye thank you everyone