The ECB’s Collateral Framework from the 1990s until the Pandemic

This chapter analyses how the European Central Bank (ECB) has dealt with risk, focusing on its refinancing operations, from its creation in the 1990s until 2020. It discusses how developments after 2010 forced the ECB to pay more attention to the financial market impact of its risk management strategy; both to the pro-cyclical dynamics in sovereign bond markets and the climate impact of bond issuers. Asking whether the ECB’s strategy is still suitable today, the chapter argues that changes are necessary, and outlines the form that these could take. The author argues that the ECB should set out principles for how policy priorities such as financial stability and environmental sustainability should inform its approach to risk. Instead of market neutrality, this should involve a policy of market attentiveness; following markets where appropriate but leaning against the wind where necessary. Two key institutional innovations to bring the ECB’s risk management practices into the twenty-first century are: improve internal credit rating facilities and enhance political coordination for monetary policy implementation.