Every atomic assertion extracted from the underlying record, ranked by evidence strength.
A fundamentally sound, well-regulated financial sector protects central banks from any form of financial dominance, allowing them to focus on their primary mandate of price stability.
Separation between monetary and financial stability considerations can be ensured if financial disturbances are caused by market dysfunction and liquidity issues rather than solvency concerns.
Quick ECB action prevented market dysfunction and aligned with expansionary monetary policy needed to counter projected inflation drops.
The TPI episode is an example of successful separation between monetary and financial stability objectives.
Temporary liquidity provision would likely have been ineffective for SVB because the underlying problem was insolvency, not illiquidity.
The ECB's Composite Indicator of Systemic Stress (CISS) soared in tandem with long-term interest rates, indicating increased financial stress.
Implied volatility in the bond market rose significantly above its longer-term average, largely driven by uncertainty about future monetary policy.
Historically, global interest rate hiking cycles frequently coincided with bank or other financial distress.
The "separation principle" posits that monetary policy stance considerations can be separated from financial stability concerns.
The "separation principle" can be interpreted as an application of the Tinbergen rule, which states that achieving a certain number of targets requires a policymaker to control at least an equal number of instruments.
If a central bank has different instruments at its disposal, its actions to safeguard financial stability need not impinge on its ability to maintain price stability.
The separation principle first appeared in ECB communication during the global financial crisis, emphasizing ample liquidity for transmission and conventional interest rates for policy stance.
Purchases under the Securities Markets Programme (SMP), introduced in 2010, were fully sterilized via reverse repurchase operations.
The distinction between conventional and non-conventional tools became unsustainable when inflation remained stubbornly below the 2% target and interest rates neared the effective lower bound.
The ECB began using asset purchases for monetary policy stance reasons, complemented by forward guidance on interest rates.
The 2021 monetary policy strategy review identified macroprudential regulation and supervision as the first line of defense against systemic financial risks.
Macroprudential policies are unlikely to be fully effective due to inaction bias and the lack of such policies for the non-banking sector.
The ECB should consider financial stability in monetary policy deliberations even with macroprudential policies, as financial stability is a precondition for price stability.
The Pandemic Emergency Purchase Programme (PEPP) was announced at the pandemic's onset due to sharply increased financial stress, dried-up liquidity, and volatility levels last seen in 2008.
The CISS suggests the PEPP stabilized financial markets and restored investor confidence, likely preventing a severe financial crisis.
The PEPP provided flexibility, allowing asset purchases to be allocated flexibly over time, across asset classes, and among jurisdictions.
PEPP's flexibility protected monetary policy transmission in the euro area when sovereign spreads diverged rapidly beyond economic fundamentals.
Sovereign spreads normalized after the PEPP announcement and an emerging agreement on European fiscal support.
The euro area experienced negative annual inflation rates at the end of 2020, followed by a sharp upward trend in inflation.
The desired monetary policy stance shifted from broad expansion to sharp tightening.
The ECB first discontinued net asset purchases under the PEPP and APP before initiating interest rate hikes.
A negative inflation surprise in the United States triggered sharp, unjustified movements in sovereign bond markets, raising fears of severe market dysfunction.
The Transmission Protection Instrument (TPI) was created to prevent financial market fragmentation and ensure smooth monetary policy transmission across the euro area during policy normalization.
The TPI allowed public sector securities purchases only in jurisdictions meeting specific eligibility criteria.
The mere option of activating the TPI halted the disorderly and unwarranted rise in sovereign spreads.
Since the TPI announcement, sovereign spreads have been range-bound and insensitive to rate expectation shifts despite repeated tightening shocks.
A steep interest rate hiking cycle in the euro area would not have been possible without the TPI.
The Bank of England intervened in autumn 2022 to address dysfunction in the long-dated UK government bond market.
The UK government's "mini budget" announcement, including historic tax cuts and increased public borrowing, caused massive repricing in the gilt market.
The gilt market repricing exposed risks at leveraged LDI funds, forcing large gilt sales in an illiquid market and threatening a self-reinforcing price spiral.
The Bank of England announced a strictly time-limited and targeted backstop purchase facility for long-term UK sovereign bonds to restore market functioning.
The Bank of England's bond purchases were announced to be reversed via timely and orderly asset sales.
The Bank of England quickly restored market functioning through interventions while simultaneously starting active asset sales from its monetary policy portfolio.
The Bank of England's balance sheet expansion from the LDI episode was short-lived and did not question the general monetary policy stance.
A series of bank failures has shaken the US financial system since March 2023.
Silicon Valley Bank (SVB) was closed in early March 2023, followed two days later by Signature Bank.
The sharp interest rate hiking cycle exposed risks at SVB due to its failure to manage interest rate and liquidity risks and insufficient supervisory scrutiny.
SVB's deposits were concentrated among large, uninsured investors in the venture capital and technology sector, making it vulnerable to rapid, synchronized withdrawals amplified by social media.
SVB held significant long-term US government bonds classified as "held-to-maturity" (HTM) assets, which were not marked to market.
Rapid interest rate increases led to sharp unrealized mark-to-market losses in SVB's bond portfolio, raising solvency doubts and triggering a depositor run.
SVB's equity and debt holders were wiped out, but large, uninsured depositors were spared losses.
The Federal Reserve established the Bank Term Funding Program (BTFP) to accept devalued high-quality collateral at par without haircuts.
Federal Reserve liquidity provision partly reversed balance sheet reduction while quantitative tightening continued as planned.
The US banking crisis did not evolve into a full-fledged banking crisis due to prompt policy response.
Regional banks in the US remain vulnerable despite policy responses.
The underlying cause of the SVB failure was insolvency rather than illiquidity.
Central bank liquidity injections are likely insufficient for solvency issues, requiring government intervention.
The vulnerabilities seen in SVB were shared by other US regional banks, though to a lesser extent.
The separation principle is harder to maintain when problems are widespread and involve solvency issues.
Euro area bank stocks and financial bond prices dropped sharply, and bond market volatility soared after the SVB failure.
Tensions in the euro area financial system after SVB were short-lived and largely confined to the banking sector.
The sell-off of euro area bank stocks after the SVB failure reflected increased risk premia and contagion fears, not deteriorating fundamentals.
Euro area banks' earnings outlook continued to improve after the banking turmoil.
Euro area bank stock prices are above their 2022 average, suggesting investors see banks as net beneficiaries of higher interest rates.
Euro area banks' return on equity has reached levels not seen in a decade.