The evolution of the Eurosystem operational framework and how recent changes may impact banks in Ireland

In March 2024, the ECB Governing Council announced important changes to its operational framework for implementing monetary policy. This Article serves to explain what an operational framework is and why it is important for the smooth transmission of monetary policy. It describes the evolution of the Eurosystem operational framework, from inception as a ‘classic’ corridor system with scarce reserves to a de-facto floor system with abundant reserves, as increasingly the ECB Governing Council used its balance sheet as a policy tool to address various crises it has faced since 2008. The new framework - a demand-driven ‘soft’ floor system - takes into account various structural changes that have emerged since the Global Financial Crisis (GFC), most notably an increased but uncertain demand for central bank reserves. The ECB is monitoring banks’ liquidity management behaviour closely and how money markets are reacting to declining excess liquidity in the system. Irish banks will need to adapt also. In this regard, we highlight certain features of the new framework and their implications for banks based in Ireland. Going forward, it is expected that recourse to Eurosystem standard refinancing operations will be used to meet banks' liquidity needs. However, it is likely that, on aggregate, recourse to Eurosystem standard refinancing operations by banks based in Ireland, as part of their regular liquidity management toolkit, may come later than in some other jurisdictions in the euro area because high levels of excess liquidity may decline in Ireland at a slower pace than elsewhere.