In the summer of 2007, the financial system began to crack in a global scope. In order to survive the financial market, central banks from many countries decided to implement unconventional monetary policies. This essay aims to present a brief description of the nonstandard monetary policies which were conducted by the European Central Bank (ECB), US Federal Reserve (US Fed) and Bank of England (BoE) during the financial crisis. First, it will be begin with the unconventional monetary policies which implemented by the ECB. The next section will focus on three main innovative nonstandard tools conducted by the US Fed. Finally, the essay will end at the description of Bank of England’s unconventional monetary policies.
According to ECB Monthly Bulletin released by October, 2010, there are two stages for ECB to implement measures in order to maintain the price stability and ensure the financial market run in a normal way.
The first stage began in the summer of 2007 which was also known as the financial turmoil. During this period, the ECB increased the amount of liquidity which was the banks in euro areas need to draw. As a result, the total quantity of liquidity drew by commercial banks was €95 billion. After that, as the Lehman Brothers bankrupted in the fall of 2008, this event indicated that the detrimental influence of the financial crisis started to spread in the globe scope. Therefore, the constant reduction of key interest rate is one of the ECB responses to the financial crisis. Specifically, according to the ECB Monthly Bulletin issued in January 2010, ECB decrease its interest rate by cumulative 325 basis points to 1%.
In the second phase, an important non-standard monetary policy implemented by the ECB is so-called “enhanced credit support”. Precisely, the ECB Monthly Bulletin released in January 2010 indicated that this policy can be roughly divided into three main programmes: the unlimited liquidity at a fixed rate; the expansion of accepted collateral and the covered bond purchase (CBPP).
Firstly, the application of “fixed rate full allotment” programme is to guarantee the commercial banks to obtain full quantity of liquidity which are at previous interest rate. Thus, this low interest rate improved the stability of the financial capital market.
Secondly, the list of acceptable collateral assets for re-funding activities was expanded. Meanwhile, the amounts of counterparties which are allowed to participate in the re-funding programmes were expanded. Namely, that is a significant growth from approximately 140 to 2,000 counterparties. This shift can achieve these goals that greater quantities of liquidity could be occupied in re-funding activities and unlimited use of the ECB’s deposit provision. The success of this non-standard policy above can be shown in the source released by ECB Monthly Bulletin on October 2010. Specifically, prior to the announcement of this unconventional policy, the amount of main refinancing...